If you are looking to start a new business, you may be considering joining a franchise. Becoming a franchisee can provide great opportunities, especially if you are looking for ongoing support while running your business. You will also, however, need to consider the legal implications of being a franchisee. This article will outline:

  • how a franchise business operates;
  • the benefits and drawbacks of a franchise system; and
  • what you should consider when thinking of buying a franchise.

What Is a Franchise?

Franchising is a business system developed by a franchisor and licensed to franchisees. The 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 that the franchisor owns and controls.

You can enter this arrangement by signing a franchise agreement. In this agreement, the franchisor will grant you the right to:

  • use their intellectual property and trademarks; and 
  • operate your business using their business structure and systems.

Why Should I Buy a Franchise?

There are a number of benefits for buying into a franchise business.

If you are unsure how to run a business, a franchise could be a great option for you. Most franchisors will provide you with a confidential operations manual. This document will give you the crucial information you need to operate the franchise business. It will detail the methods and systems you must follow.

By joining a franchise, you will also receive initial training, and may receive ongoing support from the franchisor. You will be provided with the information and instructions to run the business. 

The franchising industry in Australia is heavily regulated. The Franchising Code of Conduct is the federal legislation that is designed to protect you, as a franchisee. This Code regulates the conduct of individuals in franchise agreements. It imposes strict disclosure requirements on franchisors so you can make an informed decision on whether the franchise is a commercially viable business for you.

An additional benefit of purchasing a franchise is that your initial outlay costs may be less than starting a new business. As part of a franchise you will be able to use the franchisor’s intellectual property. This will include trademarks and franchise branding. This means that you do not need to take any steps to develop and protect your own intellectual property. You will also gain the benefit of the franchise’s goodwill and you will spend less time building your businesses reputation.

Why Shouldn’t I Buy a Franchise?

If you want to run your business independently, franchising may not be right for you. While the structured nature of the franchise business can be beneficial, there is limited room for independent ideas. You may have a different opinion on how to best run the business, however, the franchisor will dictate how to run it.

A franchise relationship will create more obligations between you and other parties. Some of your obligations to the franchisor may be onerous, and if you cannot meet them you might be in breach of the agreement. You will need to pay ongoing royalty fees to the franchisor and potentially marketing fees. You may also be obliged to order all products from the franchisor or one of their preferred suppliers at a higher cost. At the end of the term of the franchise, there may be additional fees and obligations, including restraints of trade.

If your business is not successful, there could be additional liabilities you would not face otherwise, including:

  • fees;
  • costs; and
  • debts to the franchisor.

Risks of Franchising

If you are required to sign a personal guarantee as part of the franchise agreement, your personal assets may be at risk. Here, the franchisor may be able to claim against you personally.

Conversely, if the franchisor becomes insolvent, this may affect your ability to continue trading while:

  • using the intellectual property; or
  • access to goods and services from the franchisor.

While franchising is governed by Franchising Code of Conduct and Australian Consumer Law, this does not guarantee the success of the business. You will need to seek legal, accounting and business advice before you enter the franchise. Obtaining this advice can be an additional cost, however it is strongly recommended that you familiarise yourself with the legal and financial obligations in the agreement.

Other Factors to Consider

Before making any decisions, you should contact current or previous franchisees. These individuals can share their franchising experience with you. This information is invaluable because they will be able to provide you with the best insight on how the franchisor operates and what the business is like day-to-day. They will also be able to provide you with guidance on what your income and expenditure will be like and give you a practical understanding of your obligations.

Key Takeaways

Franchising offers a structured business model that may provide you with ongoing support while you establish and operate the business. You will gain the benefits of a tried and tested system, as well as an established brand and goodwill. The franchising industry is heavily regulated, which offers some protections, but this does not guarantee success of the business. As with any business decision, it is important to do your own research to gain a full understanding of the franchise network you are considering entering into. If you have any questions surrounding the legal requirements and implications of joining a franchise network, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

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