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If you wish to grow a successful restaurant business, you may consider franchising. Franchising is where franchisors license your business’ branding to different franchisees and grant them the right to use your business’s systems and processes. These franchisees then distribute your food products through various locations using your branding. You may retain some degree of control over these businesses as a franchisor. However, your franchisees will have the primary responsibility of operating these businesses. This article explains the benefits and risks associated with franchising a restaurant.

The Ultimate Guide to Setting Up a Franchise

Making the decision to franchise your business can be difficult. This Franchisor Toolkit covers all the essential topics you need to know about franchising your business.

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Expand Your Business

Franchising is a great way to expand your business. Furthermore, franchising allows you to establish new stores in different locations without the hassle of managing and operating each business. This is because your franchisee will oversee the management of the particular store.

When your business expands into different locations, so does your market outreach. Through franchising, more people will gain exposure to your business’ brand. This can help grow your customer base and generate higher revenue for the businesses within the network.

However, since multiple businesses within the restaurant franchise network will use your business’ branding, it can become challenging to moderate your brand image. Therefore, you should put effort into curating a consistent customer experience across your franchise network to ensure your brand maintains its quality image.

Risk Management

Franchising helps you mitigate financial risk through corporate growth. If a business owner expands through corporate growth, their financial risk increases each time they hire new staff to operate a new business location or enter a new lease for a new store.

On the other hand, a franchisor does not have to sign employment and lease agreements. Instead, your franchisee can hold the lease to the business premises and hires their own staff.

However, you should note if your franchisee holds the lease, you will have little to no control of the premises (unless you have a step-in deed or associated rights). This can cause disruptions when the franchisee wants to terminate the franchise agreement

Instead, you could hold the lease and assign or license the occupation of the premises to your franchisee.

While you do not directly hire staff to operate a franchise business, you can be legally responsible for your franchisee’s breaches of the Fair Work Act in certain circumstancesFor example, this can occur if your franchisees do not provide their employees with their entitlements under the National Employment Standards or awards and agreements. Alternatively, you might know that a breach would happen or be likely to happen, but you did not take reasonable steps to prevent the breach.

Managing Financial Resources

You will need sufficient capital to establish a franchise. For instance, legal fees are one of the main costs associated with establishing a franchise. Therefore, most franchisors retain lawyers to draft and review important franchise documents such as:

  • the franchise agreement, which is a contract that solidifies both you and your franchisee’s legal rights and obligations;
  • the disclosure document, which helps inform prospective and current franchisees about the operation of the franchise;
  • applications to register any of your restaurant business’ trademarks; and
  • licence and distribution arrangements for the franchisee’s use of your business’s intellectual property.

However, one of the benefits of franchising is that you can recoup some of these initial costs through a franchise fee. A franchisee typically pays a franchise fee upon entering the franchise agreement. This fee typically covers the basic costs of providing your franchisees with:

  • training;
  • system support; and
  • marketing materials.

You should note that as of 1 July 2021, the Franchising Code of Conduct prevents you from passing on the costs of legal services for documents ‘relating to the agreement’ to franchisees. An exception to this is the initial documentation fee. This prevents franchisors from exposing franchisees to future legal costs which are unquantifiable at the time of entering the franchise agreement.

In addition, the franchise model can grant you financial rewards since you can receive ongoing:

  • royalty fees, which franchisees pay for the use of your intellectual property; and
  • marketing fees, which you can use to market and advertise your restaurant franchise as a whole.

Often, franchisors charge ongoing fees as a percentage of the franchise business’ sales as opposed to a fix-fee structure. This means that you can continue to rely on your franchisees’ ongoing contributions even if their business is generating low-profit earnings. 

Key Takeaways

If you operate a successful food business, you might consider franchising. Franchising your restaurant can allow you to:

  • expand your business by distributing your products in more areas;
  • mitigate risk through franchise agreements;
  • recoup some of the initial costs of establishing your franchise; and
  • enjoy the benefits of receiving ‘royalty’ fees.

If you have any questions about franchising your restaurant business, 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

What is a franchise fee?

A franchise fee is typically an upfront fee that franchisors charge franchisees. The initial franchise fee typically covers the franchisor’s basic costs of providing their franchisees with training, support, and marketing materials.

What is a franchise?

A franchise is where a franchisor licenses their business’ branding to a franchisee. The franchisee can then distribute the business goods and services using the franchisor’s brand.

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