11 Important considerations for establishing a Franchise
Australia has a very stringent regulatory framework for franchises, dominated by the Franchising Code of Conduct (“the Code”). There are severe penalties for breaching the Code, which underscore the critical importance of careful consideration and thorough planning when developing a successful franchise model.
The following are eleven points that should be carefully considered for any business thinking about franchising:
- A clear vision
It is important that the development of a franchise and the underlying business is underpinned by a clear vision with a defined end goal. For the purpose of drafting the franchise materials (e.g. franchise agreement and disclosure document) matters relating to the franchise and the business must be settled decisively. It is difficult to make material changes to the business or franchise model at later stages in the process.
- An understanding of the required time and cost
The franchising process is extensive. Matters must be decided carefully, with consideration of a number of factors. There are significant costs involved when developing a franchise, including seeking professional advice, the cost of preparing legal and financial documents ,the cost of vetting potential franchisees, marketing costs, training and other costs.
- Professional advice from business, financial and legal advisors
Developing a sound franchise model relies on the assistance of business, financial and legal advisors. Briefly, each provide the following assistance:
- Business advisors, experienced in franchising matters, assist with decision-making specific to franchising such as assessing and setting franchise costs, territories and marketing initiatives. They also assist in consolidating the spirit of the business and integrating it into user-friendly operational tools;
- Financial advisors provide tax and financial advice, assist in forecasting and financing, and assist with budgeting for expenditures. They are also involved in the preparation of financial statements or financial audits, as required, to be provided to potential franchisees;
- Legal advisors provide advice on regulatory and compliance criteria to ensure adherence to the Code. They are also involved in the preparation, review, and updating of legal documentation required for a franchise.
- Developed business procedures and systems
The business must have established procedures and systems for the operation of the franchised business. These may relate to:
- Customer service;
- Uniform operating techniques;
- Group marketing activities; and
- Business management generally.
Such systems must be robust (in order to ensure standards) and easy to implement by franchisees. This aspect forms a saleable component of the franchise offer.
- Marketing, intellectual property and business imageMarketing is an essential component of franchising and, at its core, consists of a business’s distinctive image, reputation, appearance and presentation. The image of the business, buttressed by the protections of registered intellectual property, provides significant value to a business’s offer of franchise. The marketing value a franchisor offers is a critical consideration for potential franchisees in assessing the viability of the franchise.
- The operations manualThe franchisor will inevitably have to prepare a manual specifying the business procedures and system for the operation of the franchised business, along with the standards and image of the franchisor. The operations manual assists the franchisor in controlling the image of the business, and provides uniform guidance for franchisees for business operations.
- Territory selectionFranchisors must consider the territory in which a franchisee will have the right to operate. Setting the criteria for each territory is important, and issues to consider include size, activity (customer traffic), access, exclusivity and value, among other factors.
- TrainingOnce a franchisee buys in to the franchised business, the franchisor is responsible for training to ensure uniformity and a strong compliance with the business’s standards and any licensing or regulatory requirements. Generally, upon becoming a franchisee, initial training is provided by the franchisor, which may be periodically reinforced with further training.
- Franchisor DisclosureIn order to comply with the Code, the franchisor must provide comprehensive disclosure to potential franchisees, given the significant financial and other ramifications involved in becoming a franchisee. Disclosure ensures that potential franchisees are fully informed as to the franchised business and its associates prior to signing on. Such disclosure includes, but is not limited to, comprehensive details of the following:
- Historical corporate and business background;
- Litigation proceedings;
- Insolvency matters;
- Referral or commission fees to agents;
- Intellectual property;
- Conditions relating to the supply of goods or services;
- Any payments required by the franchisee and conditions for refunds;
- Marketing or cooperative funds; and
- Financial information.
- Franchisee PaymentsThe franchisor must be able to foresee and disclose the costs that a franchisee will incur both initially and whilst running the franchised business. This may include the franchise fee, establishment costs, security deposits, licences, insurances, and working capital required before operations begin, as well as conditions for refunds. A franchisor also needs to consider the calculation of any royalty payable by a franchisee, the franchisee’s contribution towards recruitment and training costs, and setting the franchise fee.
- Other DocumentsThe franchisor should also consider whether the franchisee will be required to execute other documents such as:
- Lease agreements;
- Intellectual property licence agreement;
- Security agreements (e.g. mortgage, guarantee, indemnity, deposit, loan agreement, etc.);
- Confidentiality agreement; or
- Restraint of trade agreement.
It should be noted that such agreements must be provided to prospective franchisees who are afforded a mandated period for their own consideration of the franchise documentation before they sign on the dotted line.
Contact Irish Bentley Lawyers
It is important to secure experienced legal representation when developing your business into a franchise. The team at Irish Bentley Lawyers is experienced in intellectual property, franchising and commercial matters and would be happy to provide advice and prepare the required legal documentation so that a successful strategy in compliance with the Code can be adopted.
Please note that the above does not constitute legal advice and Irish Bentley Lawyers make no representations or warranties as to the accuracy of any of the information contained herein. If you are looking to develop your business into a franchise, then please do not hesitate to contact the team at Irish Bentley Lawyers – there is no substitute for proper legal advice based on your individual and unique circumstances.
Please call our office on (07) 3229 4060 for more information.