If you run a successful food company, you might consider expanding your business through franchising. Once you franchise your food company, your franchisees can distribute your food products across multiple locations through the franchise network. While you will still maintain some degree of control under this system, your franchisees will be in charge of the day-to-day operations of each business. Despite the benefits, you must understand how to franchise correctly or risk undermining your business’s success. In this article, we outline some key steps you should follow to ensure you franchise your food company successfully.
Franchising your business? This free guide will guide you through key strategies, legal essentials, and tips for successful growth.
Get Your Business Structure Right
Before you franchise your business, you must ensure that your current business structure allows your franchise to grow. Below, we outline some advantages and disadvantages of commonly used franchise structures.
Two-Tiered Structure
In most franchise systems, the founder of the food company will own shares in a holding company. The holding company should own the rights to your business concept, including the trade marks and business assets. Additionally, the holding company owns 100% of the franchise system’s shares in the operating companies. Therefore, it does not own any assets of the business.
One of the main advantages of this structure is that it protects your company’s assets if a third party sues the operating company. Additionally, you can receive some tax and investment benefits.
However, the main disadvantage of this structure is the expensive startup and management costs. This is because you must have separate accounts and records for each company. Additionally, you will need legal agreements between the companies to license any intellectual property.
Single Company
A single company franchise is where you set up a proprietary limited company to operate as the franchisor. In this sense, you can protect your personal assets since the single company operates as a separate legal entity. This means it owns assets and incurs liabilities that are separate from your personal assets.
One of the main advantages of this structure is that it operates relatively easy. For instance, a single company franchise generally has a single set of accounts and regulatory requirements.
However, one of the main disadvantages of this structure is that if your food company falls into financial difficulties, the business’ valuable assets and intellectual property are at risk of dissolution. Generally, this structure is inadvisable. However, you should consult a lawyer and an accountant before making decisions regarding your business structure.
Protect Your Intellectual Property
One of the best ways to protect your food company’s intellectual property is by registering your trade marks. A trade mark is a sign you use to distinguish your products from others. You must register your trade mark with IP Australia if you wish to gain the exclusive right to:
- use;
- license; and
- sell it.
If you successfully register your trade mark, you have the right to prevent others within the food industry from copying your company’s branding. Additionally, franchisees may be more willing to enter the franchise knowing that the business brand is secured.
Continue reading this article below the formOperations Systems
One critical aspect of your food franchise will be how potential franchisees run each branch. You should do a few things to ensure consistency in the quality of your products and that your operations systems are sufficient.
Create a Detailed Operations Manual
An operations manual contains all the information necessary to run a branch of your food franchise. This can range from how franchisees should train their staff to the core functions of your food company. Your operations manual does not have to be book-length. However, it can be as extensive as you think necessary to ensure consistency across the franchise system.
Branch Set-Up
To ensure further consistency across the franchise system, you need to create a strategy to ensure that your branch set-up is similar and identical across all stores. For example, most McDonald’s franchises have a similar layout of equipment. This is another way you can ensure consistency across the franchise network.
Training and Supporting Franchisees
You should also create training materials that give your franchisees the knowledge to make their business successful. This is especially true if you use specialised equipment to run your food company.
Additionally, you should update these training materials to ensure they are consistent with the changes in the law or industry development. Notably, you can be liable as a franchisor for some of your franchisee’s contraventions of the Fair Work Act. So, it would be best to provide your franchisees with training that covers compliance with workplace laws.
Legal Documents
The Franchise Code of Conduct (the Code) sets out certain legal documents you must supply your franchisees with. This includes a copy of the:
- franchise agreement;
- disclosure document;
- key facts sheet;
- the Code;
- franchisee information statement; and
- lease or licence to the business premises.
A franchise agreement is a contract that will bind you and a franchisee together in business. This agreement will outline both parties’ obligations and the franchise’s main aspects. This includes who owns the intellectual property and the fees your franchisee must pay.
On the other hand, a disclosure document provides current and prospective franchisees with a detailed overview of your food franchise. The disclosure document can help franchisees make decisions before entering the franchise network.
You must provide these documents at least 14 days before a franchisee signs the agreement. You should also note that franchisees have a 14 day cooling-off period after they sign the documents to back out of the agreement without any consequences.
Recruiting Franchisees
A franchise system cannot operate without its franchisees. Your franchisees will become your brand ambassadors and can consequently determine the success of your food franchise. As such, you must have a robust recruitment process to recruit those who want to buy into your vision and are committed to high standards.
Fees
Profitability is essential to a franchise since it will encourage growth and attract other franchisees to join your network. You can foster profitability by ensuring that the fees you charge franchisees are reasonable.
You should consider both initial and ongoing fees when deciding what fees to charge. The initial fee is what the franchisee pays to purchase the business. In comparison, ongoing fees are the fees franchisees pay for the ongoing right to use your franchise system and brand. In this sense, ongoing fees can take the form of:
- royalty fees;
- marketing levies; and
- ancillary fees for items such as software.
When drawing up your fees, you want to strike a balance between ensuring that franchisees see value in what they are spending and making sure that you can cover your costs of running the network.
Key Takeaways
Converting your successful food company into a franchise can benefit your business in many ways. However, you must first understand how to franchise your food company correctly to avoid legal penalties and to ensure your franchise is successful. So, to operate your food franchise, you should:
- ensure your business has a sound legal structure that is capable of growing your franchise;
- protect your brand identity by registering your company’s trademarks;
- ensure there is consistency across the network by putting in place a sound operations system;
- prepare your legal documents properly;
- recruit your franchisees; and
- establish your ongoing and initial fees.
If you have questions about franchising your food company, our experienced franchising lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers to answer your questions and draft and review your documents for a low monthly fee. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
A disclosure document provides current and prospective franchisees with a detailed overview of your franchise. In addition, the disclosure document can help franchisees make decisions before entering the franchise network.
The Trade Marks Act protects a registered trade mark for ten years from its filing date with the option to renew registration in perpetuity.
We appreciate your feedback – your submission has been successfully received.
