The basics of franchising you need to know
If you’re interested in buying a franchise, here is your guide to franchising 101.
How does it function?
Franchisees invest in an existing franchise model with a competitive advantage. This advantage may be that your selected franchisor is part of an established brand and has a strong network.
The franchisor licences to franchisees the right to operate the business to carry out services for a specific period of time – known as a franchise term. Terms can be three to five years or longer. Some brands offer an option to renew this term.
In return, franchisees pay franchisors a fee:
- initial payment
- regular ongoing fees
These payments are made in exchange for the franchisor’s expertise, tried and tested methods and brand power. Franchisees must operate the business as outlined in the operations manual provided by the franchisor.
Some franchises are defined by territories, which may or may not be exclusive.
What does the franchisor provide?
The initial investment and on-going fees can cover the following:
- training before the start of trading
- provision of an existing business model
- the backing of an established brand
- the franchisor’s operating systems and processes
- marketing support for local or national advertising campaigns
- ongoing support for the life of the term
A franchise business with a large network of franchisees may add the weight of combined buying power as a benefit to franchisees.
What makes it work?
On top of the franchisee’s ability to manage and grow the business, franchising works best when there are good relations between franchisee and franchisor. Together with power of the brand, backing of the franchisor and following a proven system, it can be a profitable venture.
The Franchising Code
It’s important to know that franchises are regulated by the Franchising Code of Conduct (the Code), administered by the Australian Competition and Consumer Commission. This document provides rules and protections for both franchisors and franchisees and it also provides franchisees with a seven day cooling off period after signing the initial franchise agreement.
What do you need to keep in mind?
It’s very important to understand that despite what is advertised by the franchisor, there is no guarantee of success or immunity from the risk of a franchisor going bust. Researching the business and the specifics of the opportunity and conducting due diligence with legal and financial professionals is absolutely necessary regardless of the brand.
Franchisee compliance is also a key aspect in the success of the network. There are two important things a potential franchisee should be asking:
- is the system compliant with the law, including the Competition and Consumer Act and the Code?
- can I comply with the system and the franchise agreement?
Reading the legal documents that come with the franchise agreement, operations manual and the disclosure document will help determine if the system is one you can follow.