Franchising is a specific type of business arrangement or structure in which the owner of a business (the franchisor) lets you (the franchisee) market and/or distribute its goods and services in exchange for payments during a specified period.
As with any business structures, franchising has its advantages and disadvantages.
The Gold Coast is the capital of Australia when it comes to small businesses and entrepreneurs. OMB Solicitors have been providing our clients on the Gold Coast with advice for more than 40 years. One of the most successful models, especially when it comes to people taking that first step and entering into the world of business ownership, is the Franchise Model.
Franchising has significant benefits both for the Franchisor and the Franchisee. Franchises, however, are governed by complex contracts and technical legislative requirements that require sound legal advice.
Becoming a franchisee – pros and cons
Making any business decision should never be taken lightly, especially when you’re making your first foray into the business world. If you’re interested in buying a franchise (becoming a franchisee), a realistic assessment of your skills, abilities and the franchise opportunity at the outset will lessen the chances of incurring undue stress, debt and legal issues in the long run. This evaluation should begin by weighing the pros and cons associated with this type of business model and of course, the franchise itself.
The pros are that you will have some of the freedoms associated with running your own small business coupled with the backing of an established business. In most cases, there’s no prior business experience required. Your chances of succeeding in this business structure may be greater than if you started your own business, providing the requisite due diligence supports the offer.
On the downside, you must enter into a strict agreement with the franchisor that dictates the terms of the arrangement. Because you are not your own boss, there is less flexibility in this type of arrangement than there would be in your own business. There is mandatory profit sharing with the franchisor, and usually no legal obligation on the part of the franchisor to renew your franchise agreement upon expiration.
Classification of franchises
Before you take the plunge, it is also important to understand which type of franchise you’re buying. The Franchise Council of Australia recognizes two broad classifications encompassing many different types of businesses.
The first grouping includes businesses in which “the whole business concept is licensed and standardised, including the name, appearance and method of carrying on the business.” Common examples include fast food restaurants, some coffee shops and convenience stores.
In the other grouping, the franchisees are legally permitted to sell products made by the franchisor, or make and sell the franchisor’s products. Common business types in this category include new car dealerships or bottling facilities.
An overview of the Franchising Code of Conduct
Under the Franchising Code of Conduct implemented in 2015, the franchisee and franchisor both have certain legal rights and obligations. It is crucial that both parties are aware of and understand them before entering into any agreements. Here are just a few of the key points.
The Code mandates that both you and the franchisor act in good faith with respect to all of your business dealings. It also specifies the consequences for breaking the rules and ensures that you are provided with certain information about franchising. It also contains provisions about online transactions and the use of funds for marketing and advertising. Finally, it prevents franchisors from “imposing significant capital expenditure except in limited circumstances.”
In addition to the rules and regulations specific to the businesses themselves, franchising law encompasses many other aspects of business law. At OMB Solicitors, our lawyers are well versed in all relevant practice areas, so contact us to schedule a time to discuss your concerns today.