In Short
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Three types of franchises in Australia: system franchises, product franchises, and manufacturing franchises.
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System franchises offer a comprehensive business model, while product franchises focus on goods distribution.
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Manufacturing franchises involve producing goods using the franchisor’s proprietary knowledge or processes.
Tips for Businesses
When choosing a franchise, consider your business goals and the level of control you want. System franchises offer structured support, while product franchises provide more autonomy. Manufacturing franchises require expertise in production and significant investment. Always ensure franchise agreements are clear on obligations and rights before committing.
Franchising has long been a popular business model in Australia, giving entrepreneurs and business-minded individuals a chance to own and operate a business with a proven track record. However, venturing into the franchising world necessitates understanding the regulatory landscape and the various types of franchising available. The franchising environment is governed by the Franchising Code of Conduct, which imposes strict compliance obligations on franchisors and franchisees. A solid grasp of the different kinds of franchises is essential for making informed business decisions and ensuring adherence to the law.
This article explores the three main types of franchising models in Australia — system franchises, product franchises, and manufacturing franchises — offering a clear overview of their differences and what potential franchisees need to consider.
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Navigating the Regulatory Landscape in Australian Franchising
The Franchising Code of Conduct sets the legal framework all Australian franchises must operate. These regulations impose obligations on franchisors to ensure transparency, fairness, and consistent business practices across their networks. Key requirements include:
- providing a detailed disclosure document;
- maintaining fair contractual terms; and
- complying with marketing and support obligations.
System Franchises: The Most Common Model
System franchises, also known as business format franchises, are Australia’s most popular type of franchise. This model typically involves a franchisor granting the franchisee a right to use a well-established business format and system. The franchisor provides a comprehensive blueprint for operating the business that could include marketing strategies, operating procedures, and brand usage. Industries where system franchises are most prominent include:
- fast food and quick-service restaurants;
- retail chains;
- service industries, such as dry cleaning and laundromats; and
- accommodation and hospitality services.
In a system franchise, the franchisee must typically operate within specific procedures, systems and branding guidelines. In return, the franchisor offers ongoing support, including training, marketing and business guidance. Franchisees often pay an initial f ee to join the franchise network and then pay ongoing royalties, which can be a fixed amount or a percentage of the business’s turnover. Additionally, if required, marketing contributions are pooled into a fund managed by the franchisor to support broader network marketing campaigns.
This type of franchise is particularly appealing to new business owners as it reduces the risks of starting a business from scratch. However, it is crucial to comprehend the extent of control the franchisor may exercise over operations, including supply chain management and product offerings. Franchise agreements must be meticulously drafted to clarify the obligations and rights of both parties.
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A product franchise focuses on the distribution of goods rather than a comprehensive business system. In this model, the franchisee operates as a distributor or retailer of the franchisor’s products within a defined geographical area. Examples of product franchises in Australia include:
- petrol stations and convenience stores;
- car dealerships; and
- appliance and electronics stores.
Under a product franchise arrangement, the franchisee is granted the exclusive right to market and sell the franchisor’s goods within a designated territory. The franchisor may provide branding, marketing support, and sometimes training. Product franchises typically involve a more straightforward business relationship, with fewer operational controls imposed by the franchisor.
The franchisee in a product franchise may operate under the franchisor’s brand, but they generally have greater autonomy in managing their day-to-day operations. However, exclusivity clauses and sales targets are common. This requires franchisees to achieve specific performance standards benchmarks.
Manufacturing Franchises: Producing with Proprietary Knowledge
Manufacturing franchises, also referred to as processing franchises, operate under a distinct business model in which the franchisee is granted the right to produce goods using the franchisor’s:
- proprietary knowledge;
- processes; or
- ingredients.
In this model, the franchisor offers technical expertise and support to ensure consistency in the final product. This form of franchising is predominantly observed in:
- food and beverage production;
- packaged goods industries; and
- health and beauty product manufacturing.
The franchisor provides raw materials or proprietary components in a typical manufacturing franchise. Conversely, the franchisee is responsible for producing the final goods for sale. The franchisee usually oversees quality control and must adhere to the franchisor’s production standards.
This model demands a significant initial investment in equipment, facilities, and technology. Franchisees must possess the capacity and expertise to meet the required production standards. Moreover, maintaining a consistent supply chain and effectively managing production timelines are essential for the success of a manufacturing franchise.
Finding the Right Franchise Fit
Franchising offers a range of business opportunities in Australia, but selecting the right model is key to long-term success. It is important to remember every franchise agreement is different.
If you have any more questions, our experienced franchise lawyers can assist you as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers who can answer your questions and draft and review your documents. Call us today at 1300 544 755 or visit our membership page.
Frequently Asked Questions
The three main types are system, product, and manufacturing franchises. System franchises provide a full business model, product franchises focus on selling goods, and manufacturing franchises allow franchisees to produce goods using the franchisor’s processes.
The Code ensures fairness and transparency, requiring franchisors to provide a disclosure document, maintain fair contracts, and comply with marketing and support obligations.
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