Starting a Franchise
Franchising is one of the biggest income earners in Australia in respect of earnings by a franchisor and also in respect of assuring an income for a small business operator working as a franchisee.
For the franchisor, the earning potential of a successful business can be increased substantially by duplicating a successful operation and selling the concept to a franchisee. For many the path to richness was commenced by taking the road to starting a franchise system.
And for many small business operators with limited or no experience, the easiest way to ensuring a viable income stream is by taking up an established franchise system as a franchisee.
Of course there are pitfalls for both the potential franchisee and the potential franchisor. The aim of this article is to highlight some of the issues that may arise and which may need careful consideration by anyone interested in starting or buying a franchise
Franchising Your Business In Australia
The decision to start a franchise requires great thought, skill, patience, capital and some luck. It is often easiest to consider franchising your business after you have been in operation for at least 2-3 years and have seen a healthy income and profit stream. The establishment of a workable franchise system from conception to marketing can be as long as three years and sometimes you will not see any return until at least another 3-4 years.
What Are The Advantages Of Franchising As A Franchisor
There are many advantages to franchising. Among the advantages:
- You will be able to see a faster growth of your business and its network by using the resources of the franchisee.
- Instead of owning a few outlets and outlaying the capital and manpower yourself, you are able to use the capital and manpower provided by the franchisee.
- You are able to service a wider territory.
- The franchisor does not have to be concerned about a large number of employees resulting in less staff problems.
- Each franchisee is motivated to work to maximum capacity to achieve maximum profit.
- You get economy of scale and a greater bargaining power.
When Do You Think You Will Be Ready For Franchising.
- You should probably have had a few years of running the business and had time to iron out all the kinks in the business.
- The Business should be successful and can be replicated. If it is not successful, of course, you will not find anyone ready to take up a franchise from you.
- Your business should be distinctive and be readily recognisable. Therefore trade mark issues should be foremost in your mind.
- You must always be sure that you get professional advice. I always tell my clients that to succeed in business and in life you need to have a good relationship with the following persons:
- Especially in the legal area, there are numerous laws protecting the franchisee which need to be covered by your lawyer.
Persons interested in franchising should contact a lawyer immediately for advice and also the Franchise Council of Australia. See their webpage at www.franchise.org.au
The Franchising Code Of Conduct (The “Code”)
This is the code that is applicable to all franchises in Australia. It was implemented on July 1, 1998 and has since been amended. The Code outlines the rights and responsibilities of franchisors to franchisees, and includes particular requirements for disclosure of information and the provision of a cooling-off period. It also covers remedies for unconscionable conduct and mediation procedures.
All franchisors have to comply with the Code. The Australian Competition and Consumer Commission enforces the Code and the penalties for breaching the Code are quite severe.
The Federal Government recently amended the Franchising Code of Conduct (“Code”) by introducing the Trade Practices (Industry Code – Franchising Amendment) Regulations 2001. The Regulations were made by the Governor General on the 28th of June 2001 and commenced on the 1st of October 2001.
You need to be fully aware of your obligations pursuant to the Code if you intend to be a franchisor.
Emphasis On Current Disclosure Documents
The regulations extend the requirement for the franchisor in providing a disclosure document to maintaining a current disclosure document. The Code now provides that a franchisor must, before entering into a franchise agreement, and within three months after the end of each financial year after entering into a franchise agreement, create a document in accordance with Division 2.1. This amendment requires a franchisor to prepare and, on request, issue a disclosure document even if it has ceased franchising.
There are also amendments regarding a short form of disclosure statement that may be applicable in certain circumstances.
A reading of the Code is imperative for any persons interested in franchising as it covers the very important issue of disclosure of financial information by a franchisor. The Code also deals with the issue of mediation when there is a problem. It is very much weighted towards helping the parties in a franchise arrangement to try and resolve their differences without rushing to the Supreme or Federal Courts.
Buying A Franchise Business
I have seen some business operators struggling in managing their own little business within their individual identity. They then make the transition to taking up a franchise where the franchise name is readily recognisable and has substantial market exposure. The business then begins to prosper. That is of course the ideal scenario and it does happen quite regularly.
However, I have also represented clients who have been caught in nightmarish franchises where the sky was promised to them by the franchisors and all they received was dirt. It pays to find out as much information as possible before taking up a franchise as a franchisee.
There are many different kinds of franchise available in Australia. They range from bathing of pets to printing of signs. Prior to buying a franchise you should:
- Select a system that you are interested in. There is no point in buying a restaurant franchise if your personality does not suit such a business.
- Ensure you have adequate borrowing capacity, including working capital, to successfully establish this type of business.
- Assess your own reasons for wanting to own a business.
- Assess the lifestyle and income implications of owning and operating a business.
- Assess what businesses are available. Market research and more market research is necessary.
- Be sure you receive and evaluate all disclosure material during the application process. Especially, make sure the disclosure documents are discussed with your accountant and lawyer.
- Check to see what competitors there are and find out how the competitors and the public rate the proposed franchise.
- Where is the supply of the product coming from if the franchise is the sale of goods. There is no point in taking up a franchise from a franchisor who cannot guarantee his supply.
- Is the business trade marked and has it any other intellectual properties.
These are just some of the questions that should be flipping through your mind when you are considering taking the franchise.
Again, it is imperative that you get accounting and legal advice before signing any franchise documents. The Code also needs to be considered to see how it applies to your situation.
The Disclosure Statement is probably the most important document next to the actual franchise agreement. Make sure you understand the contents of the documents and how it will affect you before you sign.
Tan and Tan do give advice in franchising and will be pleased to work with you. One of our favourite clients is Han’s Cafe©. We have assisted our client’s franchise from its conception as an emerging franchise to where it is now a force to be reckoned with within the cafe© business. We are also assisting other start up franchise in their exciting development stage. We will be pleased to share our knowledge and expertise to assist you in any franchise matters.
On the lighter side
You Might Be a Lawyer if…
- you are charging someone for reading these jokes
- you believe that a forty words’ sentence is a short one
- you have a daughter named Sue and a son named Bill
- you can look at a contract and instantly tell whether it’s verbal or written
- your other car is a BMW
- when you look in a mirror, you see a lawyer
- when your wife says “I love you,” you cross-examine her
And one for the judges:
A prosecuting attorney called his first witness, a grandmotherly, elderly woman, to the stand. He approached her and asked, “Mrs. Jones, do you know me?”
She responded, “Why, yes, I do know you Mr. Williams. I’ve known you since you were a young boy. And frankly, you’ve been a big disappointment to me. You lie, you cheat on your wife, you manipulate people and talk about them behind their backs. You think you’re a rising big shot when you haven’t the brains to realize you never will amount to anything more than a two-bit paper pusher. Yes, I know you.”
The lawyer was stunned. Not knowing what else to do he pointed across the room and asked, “Mrs. Williams, do you know the defence attorney?”
She again replied, “Why, yes I do. I’ve known Mr. Bradley since he was a youngster, too. I used to baby-sit him for his parents. And he, too, has been a real disappointment to me. He’s lazy, bigoted, he has a drinking problem. The man can’t build a normal relationship with anyone and his law practice is one of the shoddiest in the entire state. Yes, I know him.”
At this point, the judge rapped the courtroom to silence and called both counsellors to the bench. In a very quiet voice, he said with menace, “If either of you asks her if she knows me, you’ll be jailed for contempt!