General - Franchising Questions and Answers

Written by: Raymond Duffy

What is franchising?

It is an alliance between the franchisor and a franchisee to facilitate use by the franchisee of the franchisor’s:

• brand;
• method for doing business;
  
• marketing strategy;
  
• skillset;
  
• reputation;
  
• intellectual property;
  
• training systems; and
  

with respect to the promotion and sale of specified goods and/or services.

Is franchising a new concept ?    

No. In a commercial context franchising dates back to the 1800s.

The concept gained wider acceptance around the 1940s with its best known proponent being the McDonald’s chain of restaurants.

Is franchising regulated in Australia?     

Yes, through the Trade Practices (Industry Codes — Franchising) Regulations 1998, known as the Franchising Code of Conduct.

What kind of documentation is commonly used?

Under the Code, a franchisor is required to provide a prospective franchisee with:

(a)       a franchise agreement;

(b)       the disclosure document; and

(c)        a copy of the Code.

If there is a premises involved, the franchisor is required to also provide a copy of the lease.

The purpose of the disclosure document is give a prospective franchisee information to help the franchisee make a reasonably informed decision about the franchise system and the running of the franchised business.
Other ancillary documents will also apply, such as procedures, manuals, etc.

What are the advantages of a franchise?

There are a number of advantages of a franchised model, such as:

• standardised service across its franchised network. For example, customers know what to expect when they visit a franchised store no matter which store in the network they deal with;
• greater brand recognition and market penetration;
  
• the backing of the franchisor’s proven business model;
  
• support from the franchisor and other franchisees;
  
• potential economies of scale through greater purchasing power of the franchisor;
  
• provision of training;
  
• broad-based marketing strategies;

a regulatory system for dispute resolution and franchisor compliance.

What are the disadvantages?       

As with any business venture, you need to weigh up the risks and costs. These should include consideration of:

• your preparedness to follow and adopt franchisor specified  methodologies and procedures;
• fees and royalties payable to the franchisor both up-front and on a continuing basis;
  
• potential refurbishment costs during the life of the franchise agreement due to updates in the franchisor’s fitout and shop layout requirements;
  
• potential costs and risk to the franchisee’s business in the event of the liquidation or winding up of the franchisor;
  
• risks associated with poor performance and/or poor customer service by other franchisees in the network adversely affecting brand image and indirectly the franchisee’s business;
  
• poor management and support by the franchisor causing disunity among franchisees in the network and/or directly affect the trading performance of your business;
  
• potential loss of the franchisee’s business in the event of default under the franchise Agreement.
  

Conclusion  

Franchising is not immune to failure, as is evidenced by the recent highly publicised administration of Borders and Angus & Robertson bookstores.
As with any business venture, you need to undertake thorough due diligence and obtain quality professional advice.

If you require advice and or assistance 
with respect to franchising or commercial law in general please contact 

Raymond Duffy, Associate, Mumfords Lawyers on 07 5444 4747 or email
raymond@mumfordslawyers.com.au