Are you buying or selling a franchise business? Find answers to common questions surrounding Franchising Law for both franchisees and franchisors.
What is a franchise?
A franchise is a structured business set up to distribute products or services. The system involves two main parties; the franchisor, who owns the trademark/business name and system, and the franchisee, who makes ongoing payments and often an initial fee for the right to the franchisor’s business name and system.
A few incredibly successful examples of franchises are McDonald’s, Subway and Specsavers. They have a proven business format, are hugely recognisable and have a loyal, global customer base which are all attractive qualities potential franchisees look for.
However, you don’t have to be a global giant to have a successful franchise business. Quite the opposite in fact, after all, McDonald’s was once just a single restaurant in California.
What types of franchises are there?
There are three main types of franchises and they are the business format, product, and manufacturing, with each operating in a different way;
With a business franchise format, the franchisor provides the franchisee with an established name, trademark, and business model which they can run independently.
A product franchise is an agreement between manufacturers and retailers, allowing the retail operators to sell products using names and trademarks.
Finally, the manufacturing franchise is an agreement where the franchisor allows the manufacturer to produce and sell products under the franchise’s name and trademark.
Selling A Franchise FAQs
Why become a franchise?
Thinking of turning your business into a franchise? Becoming a franchisor yourself can produce a lot of benefits. You’ll have people you choose managing your franchises with profits as an incentive to work harder. You can grow your business through extra outlets without laying down too much of your own capital, producing high returns with relatively little risk.
What do I need to do to franchise my business?
Once you’ve worked out the structure in which you want your business to operate as a franchise the next step is to talk to a Franchise Lawyer. They will work with you to draft the legal documents involved with registering your business as a franchise, and the contracts your franchisees will sign and operate under.
Once you have all the legal documentation you can set your sights on advertising franchise opportunities and finding franchisees.
Understanding your business
It goes without saying, you understand your own business, you’ve most likely built it from scratch yourself, and been running it successfully for years. Consider all the things you’ve learned over the years about running your business, that are now instinctive for you. These may not be so obvious to a new franchisee, and so it’s in yours and their best interests to really think about and document all aspects of your business. They will succeed faster and you can influence the way businesses carrying your hard won reputation can continue your legacy.
Before you go any further, you really need to prepare a business plan for franchising. It’s probably been several years since you wrote that first business plan though, and like with most successful business, it's likely that the plan has evolved somewhat since those early days, so don’t just copy and paste from an old plan. Really take the time to do it properly, it will benefit you greatly to get the foundations right first.
You need to clearly document things such as the structure of the franchise, what will work best for your particular industry or business? Where will you / can you allocate franchise territories? What support system, training, guidelines will you put in place for your franchisees? From your own knowledge and experience, what resources will a new franchisee need including equipment, staff and premises in order to run the franchise successfully?
It’s critical at this stage that you have a very clear and documented plan of how the franchise opportunity will work, so if you’re not sure where to start with this process, contact one of our experienced commercial lawyers today and we can help.
Pilot Operation - Test Your Franchise Model
Of course, you know your business works, you’ve already proved it and wouldn’t be considering franchising your business if you hadn’t. But, you need to prove it works for someone else to pick up the ropes and run it in a new location or situation.
There are several ways to test the franchise model, either with one or more pilot operations, or by creating an in-house version where you can test your training documents, guidelines and operational manual. Seeing it in action will help you flag where you may missing appropriate materials or support that you can rectify before fully launching your business as a franchise opportunity.
Operations manual & Training Your Franchisees
A Franchise Operations Manual is a document for running the franchise that your franchisees can use as blueprint.
It should be prepared in such a detailed way, that you could hand it over to someone who is not familiar with your business, and they could ‘follow the instructions’ to train their staff, answer all frequently (and not so frequently) asked questions to get a deep understanding of how the business works, and how it should be run.
You will most likely need to organise training and / or workshops for your franchisee and their staff. This could be done either in a digital format, with a pre recorded video series or interactive webinar style conferences. This can be a great way to control consistency in your training materials, and reduced costs as you expand nationally or even globally.
However, there is a huge benefit to face-to face training, especially in the earlier days of your franchise development as the feedback you can receive from being in the same room and being able to answer questions can impact future training sessions. You can even record these sessions and use the materials you create for them to be used in an online resource down the track.
As you grow your franchise business, you should pay close attention to feedback from your franchisees, their staff, and your own staff who will likely be doing initial and possibly ongoing training with them. Use this feedback to regularly update, refine and improve the Franchise Operational Manual. It is a front-heavy workload to get this, and all your franchise documents to a high standard, but it will pay dividends once all the kinks are worked out and you can easily expand your franchise further like a well-oiled machine!
A Franchise Agreement should be drafted by a specialist Franchise Lawyer. This document can ensure your business is protected and should include rights of renewal, termination provisions, agreement length and the obligations and responsibilities of both the franchisor and the franchisee. For more information on franchise agreements and how to calculate what you should set as the initial and ongoing costs to be received from your franchisees, talk to one of our experienced Franchise Lawyers.
Our team can also guide you through the process of finding the right franchisees to expand your empire. Every step you take to get to this point is incredibly important, but it’s all for nothing if you don’t know where to look, or who to look for when you’re ready to take your franchise business to market.
Buying A Franchise FAQs
Why buy a franchise?
When you buy into a franchise and become a franchisee yourself, you’re buying into an established brand with a reputation and business model. This means you can focus on the running of your business, while things like marketing, product sourcing etc. are managed by the franchisor. There is security in being part of an established business, as well as ongoing support from the experienced people who started the business.
What should I do before buying a franchise?
Before buying a franchise it’s important to assess your current situation to make sure you have the time, money, and necessary experience to manage a franchise. You will get support from the franchisor but for the most part you will be running the business yourself.
Make sure you understand the franchise you’re interested in and work out which will best suit your experience, financial situation, and business goals.
Talk to your Franchise Lawyer. They will be able to advise you on your commitments, limitations, and other important considerations before you proceed.
What does a franchise lawyer do?
Franchise Lawyers specialise in the drafting of necessary legal documentation for the setup of a franchise business, reviewing franchise agreements, and negotiating the terms of these agreements. In some cases Franchise Lawyers are required to act when there has been a breach of the franchise agreement.
Can you negotiate a franchise agreement?
A franchise agreement is written to protect an established system and ensure uniformity and consistency of the brand, so usually, no. However, there are some things within the agreement that can be changed, such as the initial franchise fee, size of the territory, options to buy adjoining territories, and other factors pertinent to your specific area, like matching the franchise term to coincide with the lease term of your premises.
What happens with franchise breaches and disputes?
Franchises don’t always run smoothly and sometimes disagreements can arise between the franchisor and franchisee. When there has been a breach the franchisee should take steps to remedy the breach, but in a worst case scenario the franchisor may want to terminate the franchise agreement.
If the two parties cannot come to a resolution within three weeks they can refer the matter to mediation – an informal negotiation between the two parties, facilitated by an independent third party.
What is a franchise code of conduct?
On 1 January 2015, the old Franchising Code was repealed and replaced with a new Franchising Code of Conduct. The new Code applies to conduct on or after 1 January 2015 and is a mandatory industry code that applies to the parties to a franchise agreement. The Franchising Code of Conduct was created to assist the ongoing relationship between the franchisee and franchisor.
What if the franchisee does a bad job and ruins my brand’s reputation?
You will need to look at the terms of the franchise agreement to determine if there is any legal recourse against the franchisee, this is why it is imperative to ensure your franchise agreement will protect you and should be drafted by an experienced Franchise Lawyer. Your position can be strengthened by having tight clauses regarding reputation in the agreement.
It is possible to take legal action against the franchisee if there is a breach of the agreement between the parties.
What's the difference between franchising on the Gold Coast and Sydney?
If you can't find an answer to your query from the set of FAQs above, contact our experienced Commercial Lawyers on (02) 9358 5822.