BUSINESS INFORMATION
Franchising
Franchising is a business arrangement where a business operates under the brand and system of an established company, selling its products or services for a specific period.
It offers a structured way to run a business, serving as an alternative to starting a business from scratch. However, it is essential to evaluate all options and consult an experienced business adviser, accountant, or lawyer before purchasing a franchise.
Franchising in Australia is governed by the Franchising Code of Conduct. Before proceeding, you should:
- Learn about franchising and its requirements.
- Familiarize yourself with the Franchising Code of Conduct.
- Understand your rights and obligations under the Code.
Visit the Australian Competition & Consumer Commission website to access helpful resources, including videos in Hindi, Simplified Chinese, and Traditional Chinese.
Thinking about purchasing a franchise business? The ACCC offers a free online course, Is franchising for me?, designed to help you better understand franchising and how it compares to other business models.
Types of franchises
Basic: This common franchise type allows franchisees to operate using the franchisor’s intellectual property. For example, fast food outlets.
Product: Franchisees sell the franchisor’s products through wholesale or retail outlets, often with exclusive rights in a specific area. An example is motor vehicle dealerships.
Processing or Manufacturing: Franchisees manufacture products using key ingredients or processes provided by the franchisor. An example is the soft drink industry.
The cost of buying a franchise varies and includes an initial fee and ongoing royalty payments, which may be weekly, monthly, or based on turnover.
Running a franchise involves similar tax requirements to other small businesses. For details, refer to the Australian Tax Office’s resources on franchising and tax.
Additionally, securing financing for a franchise is essential as franchisors typically do not provide funding to prospective franchisees.
Advantages of franchising
- Association with a well-established brand, reputation, product, or service.
- Support with lease negotiations, site setup, and shop fit-out.
- Guidance in purchasing equipment.
- Comprehensive management training and ongoing assistance.
- Access to advertising and marketing resources.
- Ready-made standard procedures, operating manuals, and stock control systems.
- Support with financial systems to streamline operations.
Disadvantages of franchising
- Limited freedom in decision-making; franchisees must follow a standard operating manual.
- Operating within a restricted area.
- Ongoing fees to the franchisor.
- Limited control when selling; the franchisor must approve the buyer.
- Restrictive clauses after the franchise ends, including limitations on future actions.
- The franchisor is not obligated to renew the franchise, potentially reclaiming the business and its goodwill.
Franchises and retail leases
Most franchisees will need to lease commercial premises to operate their business. It’s crucial to fully understand your rights and obligations before signing any lease. Always seek professional advice before committing to a lease agreement.
A poorly negotiated lease can result in significant financial loss, especially if your business does not succeed, and you need to exit the lease. For more guidance, read our publication on leasing business premises or contact our commercial tenancy advisers.
Franchising Code of Conduct
The Franchising Code of Conduct (the Code) is part of the Competition and Consumer Act 2010 and is regulated by the Australian Competition and Consumer Commission (ACCC).
The Code protects franchisees by covering:
- Disclosure documents
- Cooling-off periods
- Management of marketing funds
- Dispute resolution
Before signing a franchise agreement, ensure you receive:
- The Code
- A disclosure statement
- An information statement
- The franchise agreement
Conduct thorough due diligence on the franchise and seek advice from a qualified business adviser, accountant, or lawyer.
Evaluating a franchise
Before committing to a franchise, it’s important to carefully assess the following:
- Operating system
- Franchisor
- Territory
- Industry
Learn more about evaluating a franchise to make an informed decision.
More information
- Visit the ACCC website for valuable resources on franchising.
- Download the Franchisee Manual for a comprehensive guide.
- Explore the Franchise Council of Australia for additional insights on purchasing a franchise.
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