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If you have a thriving small business, you may be thinking of ways to expand your business, establish your brand and capitalise on your success. While there are several ways a small business can do this, franchising is often seen as appealing because of its ability to allow fast-paced growth without the need for vast amounts of capital. For those considering the franchise model, knowing whether your business is ready to expand through franchising can be tricky. This article outlines five key indicators that may help you determine whether your business is ‘franchise ready’.

It is important to note that these are indicators and not hard and fast rules about whether a business is allowed to start franchising. In Australia, there are no legal prerequisites that dictate who can franchise their business. For example, while most businesses begin franchising after several years of operation, nothing is preventing a three-month-old business from also taking that leap. Use these indicators to work out:

  • where you are now; and
  • the things to consider if you are intending on going down the franchising path.

1. Is Your Business Appealing to Prospective Franchisees?

Firstly, consider how appealing your business is to prospective franchisees. Prospective franchisees are generally would-be business owners with experience or interest in your industry. How attractive running a near replica of your business to a prospective franchisee typically rests on one or both of two key factors:

  1. brand power: the value of an established and consumer recognised and trusted brand; and
  2. process value: the existence of clear and helpful centralised systems and processes which will make running a business that much easier.

Brand Power

Brand power is desirable to prospective franchisees. This is because it helps them feel confident in the value of buying into an established and recognised brand. Prospective franchisees want to think that the payment of franchisees fees is worthwhile when compared to establishing a separate brand. Markers of brand power include:

  • customer base;
  • geographic reach; and
  • social media following.

While brand power is important, it is not the only way to draw in prospective franchisees. Often, many businesses only establish significant brand power after they have implemented a franchise model.

Process Value

An established process value may also entice prospective franchisees..Process value can be incredibly reassuring to prospective franchisees, many of which will have never owned or operated a business before.

Clear and easy processes will often be the reason a prospective franchisee is willing to go into business themselves, and with that, be willing to pay franchise fees.   

2. Do You Have Established Systems and Processes?

It is crucial to establish process value before you begin franchising. At its core, franchising is the sharing of a business or marketing plan that the franchisor substantially suggests, controls or determines.

The plan typically takes the form of an operations manual or manuals. These manuals are comprehensive guides on how to manage and operate every aspect of a franchised business. Further, the manuals cover the technical functions that the key operator will need to perform, including:

  • placing supply orders;
  • making bookings;
  • customer greeting; and
  • uniform policy.

When considering purchasing a franchise, prospective franchisees will want to know that the manuals are available and ready to be followed. While you may have established these systems and processes over the course of operating your business, it is not enough to merely have all that knowledge in your head.

Ultimately, you need to create a tangible, central and accessible resource that collates all of the information in one place. Ideally, anyone should be able to read the manuals and effectively operate the business.

3. Is Your Intellectual Property Protected?

Another central aspect of franchising is the sharing of the franchisor’s intellectual property (IP) with the franchisee. So, if you are considering franchising your business, it is crucial that you sufficiently protect your IP.

Here, the key considerations include:

  • the registration of all trade marks used in your business. This is important as these will be used in all shared signage and marketing; and
  • protecting any inventions or designs which form part of your franchise system.

The protection of your IP is essential for two key reasons. Firstly, having clear legal ownership of the IP used in your business allows you to enforce your rights concerning the IP. This means you can take action to protect your brand.

Secondly, prospective franchisees will want to know that your rights to licence the trade marks and IP to third parties (including them) is unequivocal. A prospective franchisee will generally exercise caution in entering a franchise agreement where the franchisor does not have its trade marks registered in the country where they will be operating.

4. Have You Worked Out a Franchise Model

Franchising your business requires forethought about exactly how you want the model to work in practice. This can be especially important where your business operates in an industry that has existing franchise players. You will need to ensure that what your franchise is offering is competitive with other franchise systems.

Some of the basic parameters you will need to consider when creating your franchise model include:

  • the initial ‘start-up’ fee;
  • ongoing or recurring fees (fixed or percentage-based);
  • training of new franchisees;
  • the division of territories, and whether these will be ‘exclusive’;
  • marketing;
  • how long the ‘term’ will be;
  • the responsibility of store fit-out;
  • the ordering of stock and supplies; and
  • whether franchisees can have separate social media accounts for their franchise.

The model you decide on will dictate the types of franchise documents you require. If you are seriously considering franchising your business, it is essential to carefully consider all aspects of the franchise model before creating franchise documents.

While aspects of your model may change over time, this is not always without complication. Sometimes this results in earlier franchisees being on an ‘old model’, with newer franchisees being on different, ‘new’ model. While your model may change because of necessity – for example, a change in franchising laws – wherever possible, the closer you can get to your desired model at the start, the less complicated it will be down the track.

5. Do You Have Franchise Documents?

Finally, being franchise ready involves the creation of franchise documents. The Franchising Code of Conduct:

  • applies to all franchise agreements in Australia; and
  • requires that all franchisors create and maintain a disclosure document, which is given to prospective franchisees at least 14 days before they enter into a franchise agreement.

The disclosure document contains important information that a franchisee must be made aware of in assessing whether or not to enter into the franchise agreement. For example, it includes things like:

  • the franchisor’s business history;
  • the number of existing franchisees; and
  • a comprehensive list of expenses involved in establishing and operating a franchise.

Alongside the disclosure document, a franchise agreement is required. The franchise agreement sets out the:

  • terms and conditions; and
  • rights and obligations applicable to the franchise relationship with your franchisees.

In addition to the disclosure document and the franchise agreement, other documents may also be necessary during the assessing and on-boarding of a prospective franchisee. These may include:

  • franchisee questionnaires;
  • confidentiality agreements;
  • prior representations deeds; and
  • guarantee and restraint deeds.

Key Takeaways

If you are a business owner wanting to franchise your small business, knowing whether your business is franchise ready is vital. To help make this determination, consider:

  1. the brand power and purpose value of your business;
  2. your systems and processes;
  3. protection of your IP;
  4. your desired franchise model; and
  5. the types of franchise documents that you will need.

If you have any questions, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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