Understanding Franchises

Franchises

• the product name is already established;
• there is an immediate entry into the market;
• sharing the advertising/marketing expenses among a large number of fanchisees;
• often a lesser initial capital investment;
• readily available knowledge and market research about the product;
• an ability to compete with large companies;
• a potentially good alternative for entrepreneurs who want continuing guidance from experienced operators;
• operators are often highly motivated;
• innovative marketing techniques thrive in a franchise environment;
• combined purchasing powers.

Some of the disadvantages are:

• reliance on the expertise and assurances of the franchisor;
• complicated agreements to be understood before signing;
• some franchisors take a more serious position in relation to their ongoing responsibilities to franchisees than others.

• the franchisor's financial position;
• whether the franchise is expert in the business or whether its main business is selling franchises;
• the company records of directors’ interests etc;
• whether the franchisors are approachable and will continue to be so after you sign the agreement, and whether you will be happy to be in a long term relationship;
• whether established franchisees are happy with their franchise and the activities of the franchisor;
• the strength of the major competition in the market;
• whether the market is already saturated (look at the recent history of the oversupply of service stations for an example of this);
• who has the legal responsibility for problems with the product;
• what the total investment will be, and whether there are hidden costs;
• whether some items (like equipment) and the product itself must be purchased from the franchisor;
• the exact nature of any royalty rate that must be paid to the franchisor, and exactly how it is calculated;
• whether projected profits and costs are validated by independent means;
• the franchise agreement thoroughly, preferably with a legal expert, and the rights of the franchisor to end the agreement;
• whether you are sharing regions with other franchisees, the distance between them, and any guarantee you have against the franchisor if they sell another franchise in your territory;
• whether any market survey used to identify a new territory is compiled by a reputable organisation.

The Franchising Code of Conduct

 This Code applies to franchises made, renewed, transferred or assigned after October 1998. For an agreement to be classified as a “franchise agreement” it must contain all of the following:

• an agreement (this can be written, oral or implied);
• an existing “system” or a suggested marketing plan that is controlled by the franchisor or an associate;
• The business must be operating and be associated with a symbol or trade mark; and
• A fee has been paid, or has been agreed to be paid, to the franchisor.

It does not apply to:

• an overseas franchisor who uses only one franchise or master franchise in Australia;
• franchise agreements governed by other mandatory industry codes;
• franchisees who operate substantially the same business for at least two years before entering into the franchise agreement, and whose sales are less than 20% of the franchisee's total turnover for that type of goods or services in the first year of trading as a franchisee.

Disclosure requirements

 Before a franchise agreement is signed, a franchisor must:

• provide a "Disclosure Document" and the a copy of the Code to a prospective franchisee at least 14 days before the agreement is made or renewed;
• update the Disclosure Document annually;
• receive from the franchisee a signed statement that they have received advice about the proposed agreement from an independent legal or business adviser or independent accountant. Even if it's possible to choose not to receive advice, this is not recommended. Get advice.

• the franchisor's qualifications and the last ten years' business experience, including anyone likely to have management responsibilities;
• any litigation that is pending, and details of serious convictions and civil judgements for certain company officers;
• details of all company owned and franchised operations, and any franchises that have ceased to operate, transferred or otherwise terminated;
• details of the exclusivity or non-exclusivity of territories;
• terms and conditions upon which the franchisee is required to purchase or supply goods and services, and details of stock requirements;
• how the franchisor chooses sites for new franchises;
• details of marketing and other combined funds, and their administration;
• all establishment costs;
• a summary of the obligations of franchisee and franchisor;
• a statement of the franchisor's solvency (ability to pay debts);
• a summary of the relevant terms of the franchise agreement;
• a summary of any related agreements that the franchisee or its directors must sign, such as leases and equipment leases;
• in some circumstances, a profit and loss statement for the franchisor's last two years of operation.

• the appropriately required business experience of the franchise and its directors;
• a copy of the existing franchise agreement and any property lease;
• details of the assets of the business to be transferred;
• profit and loss statement for the last two years;
• a summary of obligations the franchisee has with the franchisor;
• details of the employees and their pay.

• if the premises are leased from the franchisor, a copy of the lease must be provided to the franchisee;
• if the franchisee has to contribute to a marketing co-operative fund, the franchisor must supply a financial statement of the funds activities;
• the franchisor cannot stop the franchisee from joining or forming a franchisee association;
• the franchisee can end the agreement within seven days of signing;
• the franchisor must provide a current Disclosure;
• the franchisor cannot unreasonably consent to transfer the franchised business, except in certain circumstances;
• in most cases the franchisor must give reasonable notice of an intention to end the franchise agreement, and allow the franchisee a reasonable time to fix any alleged breach.

• an independent legal adviser;
• business adviser; or
• accountant.

• the complainant writes to the "respondent" (the person that you are disagreeing with) explaining the nature of the dispute, your desired outcome and how this can be achieved;
• if you still can't solve the dispute within three weeks, either party can refer the dispute to a mediator;
• if you can't agree on a suitable mediator, you may refer the matter to mediation or ask the Franchising Code Mediation Adviser to appoint a mediator. You must pay your own costs. You can contact the Mediation Adviser by phoning 1800 150 667;
• despite this procedure, either of you can also take legal action if you want to.