Franchising is one of the ways of starting a business but it is important to point out that franchising is not a business, but rather a way of doing business. It is a unique and highly effective method of distributing all kinds of products, goods and services. It’s also an industry that generates direct and indirect economic impact, over $2.3 trillion in annual sales.
Franchised businesses demand products and services from other businesses and provide income to their workers and owners, who then spend their income and create still more income for other parties. Franchising has become one of the most popular ways to grow a business in Australia and franchising continues to play a very important role in the Australian economy.
In Australia, if you are considering opening and operating a franchise, there are laws you must follow including the Franchise Code of Conduct and the Australian Consumer Law (ACL). But these laws can’t guarantee your success – a franchise can fail, just like any other business.
Having said that, here are some of the steps you can follow if you are looking towards starting a franchise in Australia.
10 Steps on How to Buy or Start a Franchise from Scratch in Australia
Conduct Market Survey and Feasibility Studies (Research)
Market survey and feasibility studies will give you an idea that will determine if your business idea can survive franchising. Interestingly, in Australia, federal and state governments provide free access to statistics and other data. Use the info gathered to match your personal situation and the business environment of your area with a suitable franchise system.
Your common sense and gut feelings can also guide you in figuring out what kind of businesses could be sustainable in your locale. Once you have been able to narrow your search down to a few strong contenders, request franchise application from those franchises.
Once the franchise decides that you could be a good match for their system, they will send you a copy of their franchise disclosure document (FDD). The FDD will give an even deeper look into their business system.
Make Sure You Understand The Costs Of:
- The upfront fees
- Establishing and maintaining the franchised business
- Any significant expenditure you might have to pay
Comply with the Franchising Code
All franchise participants, including franchisors and franchisees, must comply with the mandatory industry Franchising Code of Conduct.
The Franchising Code:
- Regulates actions of franchising participants
- Aims to make sure you are properly informed about a franchise agreement before you enter into it
- Aims to provide a cost-effective dispute resolution scheme for franchisees and franchisors
While the Franchising Code determines minimum standards of disclosure and conduct, it’s not intended to replace independent legal, business or accounting advice before entering into a franchise agreement. Seek advice from a professional business adviser, accountant or solicitor with franchising experience before entering into a franchise agreement.
As a franchisee, the Franchising Code details:
- Your minimum rights and obligations
- The information franchisors must disclose to you
- The elements a franchise agreement must contain
- A mediation procedure for disputes
Draft Your Operations Manual
When it comes to franchising, you would need an operational manual and an operation manual is a guide book or document that shows your franchisees exactly how to run their business. Operational manual is expected to cover everything from how to interact with customers to the format in which franchisees must give you regular reports.
Ideally, the manual should be very detailed. The more guidance you give franchisees, the greater your ability to maintain quality throughout the franchise. Please note that the operations manual is expected to contain confidential information.
Ideally, the manual will be provided to a franchisee after they have entered into the franchise contract, or signed a document agreeing not to disclose the contents of the manual. It is important to ensure that your operational manual matches up with the terms and conditions of your franchise agreement and other documents.
Create Your Franchise Documents
If you want to start a franchise business in Australia, you will need to create a franchise agreement and a disclosure document. Aside from that, you can also require franchisees to sign other documents, including: property licenses; confidentiality agreements; non-compete deeds; and personal guarantees.
Please note that when it comes to writing franchise documents, it is always advisable to consult an attorney that is vast in franchising and business law. It might cost you a bit but it will pay you in the long run when compared to writing it yourself. Franchising is a highly regulated area in Australia, with rules about what you can and cannot include in your franchise agreement, hence the need for a professional to help you in this regard.
In Australia, there are also strict rules around how franchisees are to enter into a franchise agreement. For example, you must give franchisees a copy of the Franchising Code of Conduct along with the franchise agreement. You must also provide the franchisee with all relevant documents at least 14 days before they sign the agreement.
Enforcing the Franchising Code and ACL
The Australian Competition and Consumer Commission (ACCC) administers and enforces the Australian Consumer Law and Franchising Code of Conduct. They also provide guidance on your rights and obligations under these laws. Check the ACCC’s information for small businesses buying a franchise or extending or renewing a franchise agreement.
Buy a Franchise (Become a Franchisee)
Buying a franchise means you are going to be buying the rights to run a business under an already established brand name. Often these rights are subject to conditions that are set out in a franchise agreement. Before you buy a franchise, consider the same issues as you would if you were purchasing or starting any other business.
Do your research and understand how it works. Also, consider the issues specific to franchises, such as what happens if the franchise or franchisor fails. Once you enter into a franchise agreement, you are legally committing to run the business according to the requirements set out in the franchise agreement and the franchise operating manuals.
If your franchise agreement is a standard form agreement, you should also consider if unfair contract term laws apply. A standard form contract is one that has been prepared by the other party and you have little opportunity to negotiate the terms. The ACCC website has more information on unfair contract terms and buying a franchise.
Enter a Franchise Agreement
The franchise agreement is a legally binding document that details the rights and responsibilities of both the franchisor and franchisee. Before you sign a franchise agreement, obtain as much information about the franchise as possible and make sure you understand the risks.
As soon as you show a genuine interest in a franchise, franchisors must give you a short information sheet outlining the risks and rewards of franchising. At least 14 days before you sign a franchise agreement or make a non-refundable payment, franchisors must give you:
- A copy of the Franchising Code
- A disclosure document
- The franchise agreement in its final form
As a prospective franchisee, it is important to understand what is being offered and your rights and obligations under the Franchising Code. You should also be aware that a franchise agreement only gives you the right to operate the business for the life of the franchise agreement. There is no guarantee that the agreement will be renewed, unless specifically negotiated under the agreement.
Franchise your own business (Become a Franchisor)
If you have a successful business that you want to expand, you can consider franchising. If managed well, it can open your product or service to new markets and extend your brand’s reach. Before you franchise your business, make sure you have a successful and proven franchise model. Operating your own franchise model before selling a franchise to someone else can help prove your concept, establish demand and create sound processes and systems that can be repeated in each new franchise.
There is no specific franchise registration or approval process, but establishing a franchise is a legal process and can take some time. It’s important that you plan thoroughly and seek professional advice from an accountant, solicitor or franchise consultant with franchising experience.
As a franchisor in Australia, you must comply with the Franchising Code of Conduct and Australian Consumer Law. Check the ACCC website for other laws you may have to comply with. Under the Australian Consumer Law you must not use misleading, deceptive or unconscionable conduct in your business dealings.
If you decide to franchise your business, it’s vital that you have a good working relationship with your franchisees. Take care when you select a franchisee to ensure they are a good fit for your business. Under the Franchising Code you must act in good faith in your business dealings. If you breach certain provisions of the Franchising Code, you risk financial penalties and infringement notices.
Understand Your Franchise Tax Obligations
Your tax obligations will depend on whether you are a franchisee or franchisor.
Franchisee businesses can operate under different business structures. Like any business, your structure, earnings and assets will determine your taxation obligations.
Ongoing franchise fees are often deductible in the year you pay them. You might be able to deduct other payments including training fees and loan interest from your taxable income. Check what you can deduct with your accountant.
When you buy, sell, transfer or terminate a franchise, taxes may apply, including capital gains tax (CGT) and goods and services tax (GST).
As a franchisor, you need to understand your tax obligations and how franchising fees are treated for tax purposes. It’s also important to review your income tax and goods and services tax (GST) reporting requirements. In most cases all payments you receive from a franchisee will be assessable income. They will also involve GST.
In spite of all of the information available online, it is still a good idea to hire the services of a franchise consultant to help guide you through the process. A franchise consultant has industry-specific knowledge and can relate possibly complicated topics (including aspects of franchise agreements and disclosure documents) to you in a more understandable way. A franchise consultant could also potentially keep you from experiencing pitfalls that may happen without their expertise.