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If you own and operate a successful business and wonder how to expand, franchising could be a great opportunity for you. This article will discuss the key considerations when franchising your business. It will explore the advantages and disadvantages of franchising and outline the essential elements and initial steps required to start a franchise.

What Is a Franchise?

Franchising is where a business system is replicated and licensed to a third party. A franchise network includes similar or identical businesses, which independent business owners operate. These are the franchisees.

The franchisees use the same marketing structure and intellectual property, which the franchisor owns and controls.

What Are the Advantages of the Franchising System?

Growth and Expansion

You can open a number of franchise businesses very quickly as franchisees are responsible for establishing, operating and managing their own franchise business. This means that the growth of the franchise network is not dependent on the staff and personnel that you would otherwise need to arrange.

Franchisees should be highly motivated and hard-working individuals. The franchisee selection process must identify people with drive and ability to comply with the franchise system. A franchise system allows business owners to start their own business using an established system, which allows them to grow the business more quickly than if they had to develop their own systems and processes.

Financial Gain

You can quickly grow the franchise network as franchisees pay you for the right to join the network. This means that the growth of the franchise network is not as capital intensive for you, or as dependent on your access to capital.

Additionally, franchisees are responsible for establishing their franchise business, including paying the initial set-up costs. You will also receive ongoing fees from franchisees. 

Tested and Detailed Business Systems

Franchisees essentially buy a turnkey business with all the important components and systems developed and pre-determined by the franchisor. If a business is set up in this way, its business operations can be easily documented and shared with the franchisees.

What Are the Disadvantages of the Franchising System?

Initial Set-Up Costs

You should prepare to invest in the initial set-up of the franchise system. You will need to seek accounting and legal advice to ensure your business is ready to be franchised.

There may be a need to change your business structure, including incorporating new companies. Here, you will need to engage a lawyer to prepare the necessary franchise documents for each franchisee. 

Loss of Control

Independent franchisees own and operate the franchise businesses. You will not have direct control over their operation. It is important to recruit and train new franchisees carefully.

If a franchisee is not a good fit for the business, this could damage the brand of the franchise. You should consider each franchisee as an ambassador for the brand.

Government Regulation

The franchise industry in Australia is regulated by the Franchising Code of Conduct, which places obligations on, and governs the relationship between, franchisors and franchisee. 

Testing the Franchising System

Franchisees will want to know whether the franchise system is successful. If you currently operate a business, you should refine the systems and processes and ensure these can be replicated.

If a franchise business is unsuccessful, the franchisee will ultimately attempt to leave the franchise network. This could damage the franchise brand and may lead to loss of income. To give the franchisees the best opportunity to succeed, your systems and processes should be tried and tested, and well documented in an operations manual.

What Are the Four Essential Elements of Franchising?

Trade Marks

Trade marks are crucial aspects of any franchise business. The intellectual property associated with the franchise system rights are a large part of what you are selling to prospective franchisees. 

You should consider applying to register the:

  • name;
  • logo; and
  • any slogans used in the business. 

You will then licence the use of these trade marks to the franchisee. This ensures that the franchisee can safely use the franchise branding and benefit from the associated goodwill. Ownership of the trade marks also ensures uniformity across the franchise.

Registering the trade marks helps to ensure that third parties do not use the same or similar names or logos. Therefore, this will protect the goodwill that you have developed in the name and the logo and add value for franchisees.

Franchising System and Processes

Your business should have specific systems and processes that you use or have developed, which form part of the franchise system. These can include the specific way in which the:

  • product or service customers receive;
  • software used to manage the business; or
  • specific products or services themselves.

The more developed the systems and processes are, the more valuable the franchise system is to the franchisee. These systems and processes are unique to the franchise system and set you apart from your competitors.

Operations Manual

The systems and processes should be set out in the operations manual, which is the  ‘how-to’ guide for franchisees to operate the franchise business. It should contain all the critical information for how to run the business, including:

  • customer service standards;
  • accounting and reporting procedures; and
  • trade secrets, such as recipes, products and suppliers. 

The operations manual should be as informative and detailed as possible to ensure that your franchisees are able to properly operate the franchise business. This will ensure that each franchisee in the franchise network operates its franchise in a consistent manner. The operations manual can be provided electronically and can incorporate photos and videos to ensure that the franchisees can revisit their initial training at any time.

The Franchise Documents

The franchise documents will include a:

  • franchise agreement; and
  • disclosure document.

The franchise agreement is the legal contract that sets out the obligations of both the franchisee and franchisor. This will include:

  • fees to be paid by the franchisee;
  • how they are to operate the franchise business; and 
  • services to be provided by the franchisor.

The franchise agreement should be drafted in such a way to allow some flexibility to account for changes to the operations manual as the franchise system evolves.

Your disclosure document should outline

  • what business experience you have;
  • who the existing franchisees are;
  • whether the franchise has been involved in any disputes or litigation;
  • how your franchise fees will be spent; and
  • how much training and support you will provide.

The franchise agreement and disclosure document must be tailored specifically to your business and compliant with the franchising code of conduct. It is strongly recommended that you seek assistance from an experienced franchise lawyer to prepare these documents to ensure that they contain provisions appropriate for the compliance of your franchisees.

Key Takeaways

Once you have these four elements in place, your business will be ready to franchise. If you have any questions about how to set-up your franchise system, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions about Franchising a Business

Q: What is a franchise agreement?
A: A franchise agreement is a document that governs the relationship between the franchisor and the franchisees. It includes the duration of the agreement, rights of renewal and termination process.

Q: What is the Franchise Code of Conduct?
A: The Franchise Code of Conduct provides the national regulations for franchising – it sets out the rights and responsibilities of franchisors to franchisees including disclosure of information and regulations concerning the franchising system.

Q: How much does it cost to franchise an idea?
A: This will depend on the franchise system and the complexity of the business. A large system will cost into the tens of thousands as it will require a broader identification of markets, territories, locations, etc.

Q: What is the Franchise Council of Australia?
A: This is the peak body for franchise organisations and businesses in Australia. It promotes the exchange of information between franchises.

Q: Can you franchise an idea?
A: This is not possible – you must franchise a tried and tested business formula that has already been in existence.

How can LegalVision help me?

LegalVision assists businesses and individuals with tailored online legal advice for a fixed-fee. We specialise in franchise law and can assist you with any stage of franchising a business. Call LegalVision today on 1300 544 755.

In 2017, LegalVision launched a Franchisor Toolkit. With case studies from leading Australian franchisors, this free Toolkit is essential reading for business owners looking to accelerate their growth. Download now.

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