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Dear Subscribers,

Welcome to our March Quarter E-Newsletter - Franchising Arrangements.

In this issue we discuss some of the key issues for businesses and self-employed persons looking to either establish a franchise or to purchase one.

In the last decade and a half we have seen enormous growth in this area with the franchise industry generating huge turnover and representing a large piece of the small business market. It is difficult not to see these days across suburbia the very visible growth in franchise arrangements in the home services area from lawn mowing to cleaning and handyman activities. But clearly, it does not stop there. Walk into any large retail shopping centre and you will find numerous food outlets and other service-based businesses, which belong to a franchising system.

Businesses Looking to Franchise

This area of commerce is now heavily regulated across Australia through the Franchising Code of Conduct. This Code is prescribed under the Regulations to the Commonwealth Trade Practices Act 1974. One good thing is that the laws are consistently uniform throughout the length and breadth of the country.

Compliance requirements

Significantly, a business looking to franchise must maintain a disclosure document designed to inform prospective franchisees about the business of the franchise being purchased and to help the franchisee make informed decisions. This disclosure document must be in the required form. It is to contain details among other things about the franchisor, the franchisor’s health and details about the business for sale. The franchisor must supply to a prospective franchisee this disclosure document, a copy of the Franchising Code and a copy of the franchising agreement at least 14 days before signing up any prospective new franchisee. The franchisor must also obtain a signed statement from the prospective franchisee that they have received these documents and have taken independent advice concerning them.

There are a range of other compliance requirements under the Code, but at first blush, setting up a franchise system requires considerable thought and effort in meeting the obligations under the Code. The Australian Competition and Consumer Commission (ACCC) oversees the compliance regime. It’s not for the feint hearted and the documentation needs to be comprehensive and accurate.

Business considerations

Apart from the compliance issues, businesses looking to franchise need to first consider a range of other questions. Considering these first can save a lot of heartache later. Obviously, it pays to have a successful undertaking and brand with a good track record of success. Secondly, how easily can scale in operations be achieved (can their business model be duplicated or does all the intellectual know how and expertise to run the business only reside in a few)? Thirdly, does the business have the capacity to manage the necessary systems to be put in place to drive a successful franchise system? These issues need to be considered.

Self-Employed Looking to Buy

The benefits of purchasing a franchise business is that the franchisee has the flexibility of running their own ‘show’, whilst at the same time being provided with a guaranteed income for a period of time until they get on their feet. What often arises is that the franchisee pays an upfront capital amount for the goodwill of the franchise (which can include an amount for training and merchandising) as well as an ongoing monthly fee.

Investigate, investigate, investigate

For prospective franchisee’s, what are some of the things to watch out for?

Well doing your due diligence up front is very important and this means investigating that the franchise system meets your expectations – levels of profit, training and support. Linked to this is whether the initial goodwill component and ongoing fees ensure sufficient profitability. Talking with past and present franchisees is also important and as well as developing a business plan. Also, check out how solid are your rights over your territory and whether these can be changed without consultation with you. What you get back on transfer and sale should you wish to move on in the future are also critical and the likely processes involved at this time.

The difficulty in this area generally is that most franchisors are reluctant to provide estimates of earning potential, so make the most of the information in the disclosure statement and your follow ups from it.

Conclusion

Franchising systems across Australia are likely to continue to grow and the rules that regulate this area of commerce are also likely to become more extensive to cater for the types of situations that can arise. The lesson on both sides (for businesses looking to franchise and persons looking to buy) is to enter the field with eyes open on the benefits and risks by doing your due diligence.

Hill & Co Lawyers are able to provide advice across the whole range of franchising systems.

PETER HILL