Perhaps your business has grown over the past few years and you are managing several employees over a number of stores. You could be thinking about how to expand your business. You have two options that allow you to maintain the quality of the business you started:
- corporate growth; or
- franchise your business.
This article will discuss why you might choose to franchise instead of opting for corporate growth. It also sets out how you can turn your growing business into a franchise system.
Franchising vs Corporate Growth
Franchising is one way of growing your business. In a franchise, other business owners buy into your business concept and run the day to day operations of a store or branch while you receive a portion of the profits and license fees.
This is different from corporate growth. Corporate growth is when you fund the opening of new branches or stores of the company you own. Your own employees run these branches.
Corporate growth can work well in situations where:
- there is not a high capital cost of opening new branches, for example, tech companies instead of retail companies; and
- you have the capital in your company to open a new branch and you have the staffing to oversee the running of the stores.
Franchising may work better than corporate growth in situations where you:
- may not have the capital in your company to fund opening a new branch;
- have reached your capacity to oversee more branches or stores; or
- have a business concept that other people are interested in or would like to buy into.
How to Franchise Your Business
1. Structuring a Franchise System
If you have decided that franchising your business is the best option, the first step is to make sure that your business structure is appropriate. Your business structure must allow your system to grow quickly while protecting your branding and business concept.
Franchise systems commonly have a business structure where the business founders own shares in a holding company. The holding company owns the rights to the business concept and should own all of the trade marks for the brand. This holding company also owns 100% of the shares in the operating companies of the franchise system. The operating company does the trading of the business, such as entering into contracts with:
- employees (you will still need assistance in your head office); and
- landlords (if you need physical stores).
For example, most retail franchise systems will have three operating companies:
- X Franchising Pty Ltd;
- X Leasing Pty Ltd; and
- X Operations Pty Ltd.
This structure allows the franchise system’s liabilities to be separated from its assets. Therefore, implementing a legally solid business structure is an important step to setting up a system that can grow while continuing to protect its business concept.
2. Protecting Your Concept
The next step when setting up your new franchise system is to protect your unique business concept using a trade mark. This concept is why franchisees will want to pay franchise fees. The last thing you want is another system to copy the concept and your branding.
You cannot trade mark your business idea. However, you can trade mark your:
- business name;
- logo; and
Trade marks are registered for 10 years with the possibility of renewal. However, the application process takes seven to eight months and is on a first-come-first-served basis. Therefore, if you haven’t trade marked your business name already, you should start the application process as soon as possible.
Additionally, recipes can be treated as trade secrets and confidential information. Whenever you are speaking to potential franchisees, you should have a confidentiality deed in place before providing them with further details about how your business concept works.
3. Systemisation and Operations
The third step is to turn your business concept into a system so that a potential franchisee can run a branch or store and still provide the same quality of goods or services. There are three aspects to creating this system:
- create an operations manual;
- ensure setup is consistent across stores; and
- have a system to train and support franchisees.
Firstly, franchise systems usually provide an operations manual as a guide for franchisees. However, an operations manual does not have to be a 200 page book. Many franchise systems provide online operations manuals and an online portal for franchisees to access this information. When creating this operations manual, think about the best way to present an A to Z checklist of how to run your business concept to someone who has never run one before.
Secondly, you will also need to create a system to ensure that the setup of your franchise branches or stores is consistent. Most franchise concepts have a set of store fit-outs that are copied across all of their stores.
Thirdly, you will also need to make sure that you have a system for training and supporting your franchisees. This will ensure the quality of your business concept is maintained across your entire franchise system.
4. Legal Documents
The fourth step to setting up a franchise system is making sure that you have your legal documents in place. Franchising in Australia is governed by the Franchise Code of Conduct. Under this, your franchisees will need to receive a copy of the:
- franchise agreement;
- disclosure document;
- Franchisee Information Statement; and
- lease or licence to the store premises (if you have physical stores).
These documents must be provided to franchisees 14 days before they sign them and franchisees also have a seven day cooling off period after they have signed the documents. In this period, the franchisees can back out of the agreement without any consequences.
To ensure you set up this system correctly, you should find a franchise lawyer to draft a master franchise agreement, disclosure document, and licence to occupy (if you have physical stores). These documents cover the details and terms of a franchisee owning a store or branch in your franchise system. The Franchisee Information Statement is a document provided as a matter of form by the Australian Competition and Consumer Commission that you can provide to your franchisees.
5. Recruiting Franchisees
Once these steps are complete, you are ready to recruit franchisees into your franchise system. Often, franchise systems take special care when selecting their first couple of franchisees as they are brand ambassadors.
The success of these franchisees can determine the success of the franchise system. Some franchise systems have even recruited employees in their existing store to be their first franchisees.
Overall, franchising is a good option for businesses that have an excellent business concept and branding but limited capital to support corporate growth.
If you want to franchise your business, you will need to:
- set up the right business structure;
- protect your concept and branding;
- create a system for your business concept and operations;
- draft legal documents that are compliant with the Franchise Code of Conduct; and
- recruit the right franchisees for your franchise system.
LegalVision has set up many successful franchise systems. If you have any questions about turning your business into a franchise system, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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