In Short
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Franchising success relies on understanding the business model, franchise documents, and franchisee selection.
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The Franchising Code of Conduct regulates transparency, fairness, and good faith in franchising agreements.
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Ongoing compliance with the Code is crucial, including regular updates to key franchise documents.
Tips for Businesses
Franchisors must ensure the business model is replicable, develop clear franchise documents, and select franchisees carefully. Compliance with the Franchising Code of Conduct is vital for legal and operational success. Regularly update disclosure documents and maintain a strong, transparent relationship with franchisees for long-term franchise health.
As a prospective franchisor, establishing your franchise network can seem overwhelming. Given the range of considerations facing you when you begin life as a franchisor, it is important to be aware of the key fundamentals of franchising. This article will set out these fundamentals and detail best practices to ensure you are set up for success when franchising your business.
Understanding Your Business
The foundation of a successful franchise network is the business model. Just because you have established a successful business in your own right does not necessarily mean that your model or ways of doing business will successfully translate to a franchise. As such, before franchising your business, carefully evaluate what has made your business a success. Consider whether these factors will be present when expanding into a franchise model.
You also need to be introspective and consider whether you are suited to the position of a franchisor and have the time and resources to run a successful franchise.
Finally, you will need to have an in-depth understanding of the operations of your business to successfully provide franchisees with the tools and advice necessary to run their own franchised business. You will need to provide franchisees with a comprehensive operations manual outlining your systems and processes for day-to-day operations and bigger-picture processes, such as marketing.
Preparing Your Franchise Documents
If you choose to start a franchise, the next step is to prepare the necessary franchise documents as prescribed by the Franchising Code of Conduct. The table outlines key documents that you will need to prepare.
| Franchise Agreement | This document governs the relationship between the franchisor and franchisee. It sets out each party’s rights and obligations to each other and the key commercial terms of the agreement. |
| Disclosure Document | This document sets out all of the key information that the franchisee will need to be aware of in joining the franchise network. Your disclosure document should include: + details about the franchisor; + information about other franchisees; + information to operate the franchise network; and + costs the franchisee can expect to incur in joining the franchise network. |
| Key Facts Sheet | This document acts as a high-level summary of the disclosure document. It outlines the most important details for franchisees to note. |
Depending on the nature of your business, there may be other documents you will need to prepare, particularly if the franchisee will be operating from physical premises under a lease. Given the legal considerations in drafting these documents, you should seek the services of a specialist franchising lawyer.
Continue reading this article below the formFranchisee Selection
Another franchising fundamentals involve fostering a productive ongoing relationship between the franchisor and franchisee where both parties can benefit from the other. Therefore, selecting the right people to grant a franchise to is a crucial part of being a franchisor. Ignoring this step is a surefire way to guarantee your franchise’s short- or long-term failure.
As a franchisor, you trust other people with your intellectual property and brand image. Franchisees who fail to implement your systems and way of doing business can significantly damage your business’ reputation and goodwill. Therefore, you must undertake thorough due diligence of any prospective franchise before granting them a franchise and the right to use your intellectual property. Make sure this due diligence extends to getting an idea of the franchisee’s personal character. The personal relationship between you and your franchisees can determine whether you can establish a successful long-term business partnership.
Understanding the Franchising Code of Conduct
Unlike other business models, franchising is regulated by an industry-specific code, the Franchising Code of Conduct (‘the Code’). As a franchisor, you must always operate your franchise in compliance with the Code. The Code derives from the Competition and Consumer Act, meaning any breach can attract significant fines or penalties.
The most important rule is to be open and upfront about the transaction. As a franchisor, the law considers you the ‘stronger party’ because of your control over the franchisee’s operations and the information they receive. Under the Code, you must provide the franchisee with:
- copies of the Code;
- the franchise agreement;
- disclosure document; and
- other key franchise documents;
at least 14 days before the franchisee signs the agreement or hands over non-refundable money (e.g. a deposit or franchise fee).
Additionally, always act in good faith when dealing with your franchisees, as this is a key obligation under the Code. Always be honest during negotiations to avoid misleading or deceiving a franchisee.
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Continued Compliance With the Code
Under the Code, your obligations are not complete once you recruit franchisees and they begin operating their business. Indeed, you will have several ongoing obligations. In particular, the Code requires you to update your disclosure document and key facts sheet every year, or you risk incurring heavy penalties. This update will also require you to provide your financial statements from the previous financial year. You might wish to obtain an independent audit report. Further, you will need to update these documents if any materially relevant facts about your business change. These facts may include:
- a change in the franchisor’s majority ownership;
- details of criminal and civil legal proceedings involving the franchisor;
- an award in arbitration against the franchisor; or
- the existence and content of undertakings or orders under the Competition and Consumer Act given by or made against the franchisor.
Key Takeaways
Starting a franchise as a franchisor is a big decision that requires careful consideration. In making this decision, you should consider some key fundamentals of franchising, including:
- understanding the nature of your business and industry;
- preparing the necessary franchise documents;
- selecting the right franchisees
- understanding the Franchising Code and Conduct; and
- ensuring you continue to comply with your many ongoing obligations under the Code.
If you require support in establishing or running a successful franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
What is the Franchising Code of Conduct?
The Franchising Code of Conduct is an industry-specific regulation that sets out obligations for franchisors, including transparency, fairness, and good faith dealings with franchisees.
What documents are required when starting a franchise?
Key documents include the franchise agreement, disclosure document, and key facts sheet. These documents ensure clear communication between franchisors and franchisees.
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