Franchising is a $144 billion sector in Australia.
Franchising adds a layer of experience and certainty to a new business venture that is not present in a non-franchised start-up. It is similar to purchasing a new business, but without the responsibility of taking over existing hidden liabilities.
The Franchisor is expanding their business by allowing the Franchisee to use their brand, reputation and business model for a fee paid by the Franchisee. The Franchisee is paying that fee to start a new business based on a model with a history of success but is agreeing to be restricted in the way in which the business is run to limit the chances of failure.
A Franchisor intends to offer a Franchisee a simple model for the Franchisee to follow and achieve the Franchisor’s success. The Franchisee intends to receive a properly structured business with a strong reputation that will be quickly successful. If this is the case then the success of the Franchise should be primarily determined by the business concept, market forces, timing and the effort of the parties.
However, even with the best of intentions, not all Franchisees or Franchises will succeed as our Franchise Lawyers often see. Failure can come in many ways, and Franchising is not without its risks. Franchisees should remember that without significant ‘skin in the game’ the Franchisor may be invested in the success of the Franchise, but not in its failure. Similarly, Franchisors should remember that a Franchise’s success will be determined by the motivation and ability of its Franchisee – a Franchise is rarely successful solely because it is based on a good model – it is the commitment of the Franchisee to its Franchisees and the execution of that model that determines the success.
Where things go wrong are often in the promises that are made that do not bear fruit. This is why open communication is essential to establish a Franchise that is successful for the Franchisor and the Franchisee.
An advantage in purchasing a Franchise is that the Franchising Code of Conduct (as replaced on 1 January 2015) governs the relationship between Franchisor, Franchisee and prospective Franchisees. This new Code is quite beneficial to protecting Franchisors, Franchisees and prospective Franchisees, but is only useful to the extent that the Franchisor, Franchisee and prospective Franchisee know and understand their rights.
For example, a prospective Franchisor is obliged under the Code to create a disclosure document relating to its Franchise that gives a prospective Franchisee current information that is material to the running of the Franchised business to help the prospective Franchisee to make a reasonably informed decision about the Franchise.
For the Franchisor, the disclosure document is the first step in establishing the model to success that they wish to build and puts in one place the promises about the chances of success of their Franchise. Getting the disclosure document correct ensures that the Franchisor is both able to sell their model and comply with their obligations under the law. There are serious penalties for Franchisors for non-compliance with the Code and its disclosure obligations (for example see this blog on overselling your Franchise), which is why Franchisors should receive legal and financial advice on preparing their disclosure document.
For the Franchisee, the disclosure document is their first chance to “look under the hood” of the model and get an idea how replicable the Franchisor’s success will be. The Franchisee who knows their rights will be able to review a disclosure document and understand what powers they will have should the business model fail as a result of inaccurate or misleading disclosures.
Watkins Tapsell are members of the Franchise Council of Australia. We also have experienced Franchise Lawyers in our Business and Commercial Law team who can assist you if you are thinking of buying or selling a Franchise to make sure you are aware of both your rights and obligations.