FRANCHISING

Franchising is a form of relationship between you and the company you buy a license from.A franchise is
a form of business that involves an existing business allowing third parties to operate under the same
trade/brand name, with access to their sales, distribution or manufacturing channels. Franchises are
usually given the provisory that the owner receives a percentage of the profits from sales and a one-off
initial fee.

As franchising has developed, so too has its definition, and with that natural evolution, we’ve seen many
new and intriguing types of franchise agreements develop.Franchising describes the business
relationship between the franchisor and franchisee. When opening a franchise, the franchisee agrees to
run their own business under the same business name for a fee. The specific franchise agreement
determines the relationship between the franchisor and franchisee.

While a franchisor is an established entrepreneur with a licensed business model, a franchisee is a

person or corporation that owns and operates the business using the business model licensed by the
franchisor. Franchising describes the business relationship between the franchisor and franchisee

What is the role of the franchisor?

The role of the franchisor will vary depending on the specific business model and the franchise
agreement. Above all else, the franchisor offers the franchisee a valuable opportunity to run their own
business without the common risks of independent startups.

Some common franchisor responsibilities include:

Allowing the franchisee to provide services under the business’ brand name

Providing initial training on how to grow the business and perform day-to-day operations based on their
proven business model

Provides on-site training and support leading up to and after the grand opening day

Offering an approved list of vendors and suppliers for necessary equipment and materials

Providing effective marketing programs and advertising materials

Providing guidance in terms of developed business practices

Ensuring that the franchisee receives ongoing support with operations, marketing, administration, and
more

What is the role of the franchisee?

After the franchisee pays the initial franchising fee and signs the agreement, they agree to represent the
established business. Franchisees generally have the following responsibilities:

Developing the franchisor’s business in an established location and protecting the brand’s reputation

Covering different types of costs to establish their business

Investing time to learn about the business’ standards and operations

Closely following business and operational practices and procedures

Following the business marketing strategy using brand usage guidelines

When both the franchisor and franchisee keep up their responsibilities and obligations outlined in the
franchise agreement, both parties can enjoy the benefits of a successful, thriving business

Advantages of buying a franchise

CAPITAL

The franchisor’s capital requirements will be lower because the franchisees provide the capital to open
each franchised outlet.

MOTIVATED AND EFFECTIVE MANAGEMENT

The local management of each franchised unit will be highly motivated and very effective. They treat the
franchise units as their own and that will usually lead to higher sales and profit levels.

FEWER EMPLOYEES
The number of employees which a franchisor needs to operate a franchise network is much smaller than
they would need to run a network of company owned units.

SPEED OF GROWTH

The franchise network can grow as fast as the franchisor can develop its infrastructure to recruit, train
and support its franchisees.

REDUCED INVOLVEMENT IN DAY-TO-DAY OPERATIONS

The franchisor will not be involved in the day-to-day operations of each franchised outlet.

LIMITED RISKS AND LIABILITY

The franchisor will not risk its capital and will not have to sign lease agreements, employment
agreements, etc.

INCREASING BRAND EQUITY

Levereging off the assets of franchisees helps franchisors grow their market share and brand equity
more quickly and effectively.

ADVERTISING AND PROMOTION

Franchisor will reach the target customer more effectively through co-operative advertising and
promotion initiatives.

CUSTOMER LOYALTY

Franchisors use the power of franchising as a system to build customer loyalty- to attract more
customers and to keep them.
INTERNATIONAL EXPANSION

International expansion is easier and faster, since the franchisee posesses the local market knowledge.

Disadvantages of buying a franchise

Buying a franchise means entering into a formal agreement with your franchisor.

Franchise agreements dictate how you run the business, so there may be little room for creativity.

There are usually restrictions on where you operate, the products you sell and the suppliers you use.

Bad performances by other franchisees may affect your franchise’s reputation.

Buying a franchise means ongoing sharing of profit with the franchisor.

Franchisors do not have to renew an agreement at the end of the franchise term.

Disadvantages of franchising for the franchisee

While there are many advantages of franchising, it would be remiss to think there aren’t also
disadvantages. Let us explain further.

1. Restricting regulations

While a franchise allows the franchisee to be their own boss, they’re not entirely in control of their
business, nor can they make decisions without taking into account the opinion of the franchisor.

For most franchisees, the most frustrating disadvantage that they face is that they must follow the
restrictions laid out in the franchise agreement. The franchisor can exert a degree of control over the
majority of the franchise business and decisions made by the franchisee.

Depending on the franchise agreement, the franchisor can control any of these aspects of the business:

Business location

Hours of operation
Holidays

Pricing

Signage

Layout

Décor

Products

Advertising and marketing

Resale conditions

These restrictions are put into place to maintain uniformity between the different franchises and the
overall brand, but they can also be frustrating and feel limiting for the franchisee.

2. Initial cost

While the initial investment of the franchise fee buys a lot of benefits for the franchisee, it can also be
costly—especially if you’re joining a very well-known and profitable franchise. While this often translates
to larger profits, coming up with this initial money can put a strain on any small business owner.

Even if you opt for a low-cost franchise, you’ll likely still have to front a few thousand dollars. While this
can be seen as a disadvantage of franchises, it’s important to weigh the opportunity against the initial
investment and find the right balance for your business. And keep in mind, there are also franchise
financing options to help you come up with this initial cost.

3. Ongoing investment
In addition to the initial investment you’ll have to provide to start your franchise, there are additional,
ongoing costs that are unique to franchises. Within the franchise agreement, the ongoing costs of the
franchise should be enumerated. These costs might include royalty fees, advertising costs, and a charge
for training services.

You’ll want to keep these ongoing fees in mind when you’re deciding whether to start a franchise.

4. Potential for conflict

While one of the benefits of owning a franchise is the network of support you receive, it also has the
potential for conflict. Any close business relationship, especially when there’s an imbalance of power,
comes with a risk that the parties won’t get along.

While a franchise agreement states the expectations of both the franchisee and franchisor, the
franchisee has minimal power to enforce the franchise

Lack of financial privacy

Another disadvantage of franchising is a lack of privacy. The franchise agreement will likely stipulate that
the franchisor can oversee the entire financial ecosystem of the franchise. This lack of financial privacy
can be seen by franchisee as a disadvantage of owning a franchise; however, it may be less of an issue if
you welcome financial guidance.

Advantages of franchising for the franchisor

The advantages and disadvantages of franchising don’t solely apply to the franchisee, of course. The
franchisor should also weigh the pros and cons before deciding to enter into this business model. First,
let’s explore the benefits of franchising that the franchisor can enjoy.

1. Access to capital

One of the biggest barriers to expansion for small business is the money it costs to expand. And while
there are several business loan options, they don’t always pan out. Franchising your business will take
some time and money on your end, but it also has the potential to make you a lot of money in the form
of franchise fees.
Expanding your business as a franchise allows you to expand with little debt. The business expands as
capital becomes available from franchisees instead of taking on debt through loans. The franchisor also
shares minimal risk with the franchisee because the franchisee puts their name on the deed for the
physical location of the business and lowers the franchises overall liability.

2. Efficient growth

Opening the first unit of a business is costly and time consuming. Opening a second unit can be almost
as difficult. When that burden is shared with another business owner, it makes the process more
efficient and takes the onus off the initial business owner.

When trying to grow your small business, starting a franchise can make opening multiple locations a
much simpler process.

3. Minimal employee supervision

One of the big stresses as a business owner is hiring and managing employees. As a franchisor, the only
support that you have to provide to the franchisee is training and business knowledge. In general, the
franchisor has no hand in the management, hiring, and firing of employees.

This minimal employee supervision allows the franchisor to focus on the growth of the business instead
of day-to-day operations. Instead of worrying about whether an employee shows up for their shift or
not, the franchisor is focused on the big picture for business success.

4. Increased brand awareness

One of the many benefits of franchising is increased brand awareness. The more locations the brand
has, the more people who are aware of the brand. And the more these customers come to know and
love the brand, the more profitable and successful the brand can be. This increased brand awareness of
a multi-location franchise can be highly beneficial to the franchisor and their franchisees—a win-win.

5. Reduced risk

One of the biggest benefits to the franchisor in a franchise agreement is the ability to expand without an
increase in risk. Because the franchisee takes on the debt and liability of opening a unit under the name
of the franchise, the franchisor gets all the benefit of an additional location without taking on the risk
themselves.
Additionally, the franchisor is often further insulated because the franchise is incorporated as a new
business entity, leaving the original business owned by the franchisor as a separate entity from the
franchise. A franchise lawyer can help to set up the terms for this type of protection within the franchise
agreement.

Disadvantages of franchising for the franchisor

While franchisors receive a lot of benefits from starting a franchise, there are also some disadvantages
to consider.

1. Loss of complete brand control

When a business owner opens an independent business, they maintain complete control over their
brand and every decision that happens within the business.

When a franchisor allows a franchisee to open a business under their brand, they’re giving away
(actually, selling) some of the control over their small business branding. While the franchise agreement
should contain strong stipulations and rules to guide the decisions made by the franchisee, your
franchisees won’t be clones of you. They will think and act differently, and your brand could wind up
suffering because of it.

2. Increased potential for legal disputes

Any time you enter into a close business agreement with other people, you open yourself to the risk of
legal disputes. While a well-crafted and lawyer-approved franchise agreement should limit a lot of the
possibilities for legal disputes between the franchisor and franchisees, these disputes are still possible.

Any legal disputes that must be resolved in mediation or through the court system can be costly in both
time and money, which takes away from the success of the franchise.

3. Initial investment

While much conversation is devoted to the initial investment that a franchisee must make in the
franchise, that ignores the initial cost that is taken on by the franchisor.

When a franchisor starts a franchise, there’s a startup cost to get the business in operation. A franchisor
must make sure that the franchise agreement is written clearly and reviewed by a lawyer experienced in
franchise law. You may also hire a franchise consultant for expertise during this process. Starting a
franchise requires an initial investment of both time and money on the part of the franchisor.

4. Federal and state regulation

While not entirely a drawback, dealing with the federal regulations set down by the Federal Trade
Commission for franchises can be a nuisance for franchisors. These regulations ensure that franchises
are operated fairly, but it also requires time and effort from the franchisors to meet all of these
regulations.

And while you don’t have to file your agreement with the federal government, you do have to file with
some states—and you will have to make sure you’re compliant with different state’s laws. This can be a
time-consuming process, but can be made easier with professional guidance.

Franchisee self-assessment

Before choosing a franchise, you need to ask yourself the following questions:

Do I have the ability, commitment and personality to run my own business?

What are my strengths and weaknesses?

What type of business appeals to me?

Can I work within the limits of a franchise?

Am I prepared to go into debt to buy a franchise?

Am I prepared to work long hours and make sacrifices?

Do I have the support of my family?

The franchisor

How long has the franchise business been established and what is its reputation?

Who owns the franchising organisation and what is their record?

Are they members of the Franchise Council of Australia?

Are they aware of and fully compliant with the mandatory Franchising Code of Conduct?

How robust and successful is the franchise system?

What active support does the franchisor provide in terms of training, purchasing, choosing a location,
marketing and advertising?

The franchise product or service

Do the products and services cater for ongoing client needs? Are they just a novelty or do they cater for
seasonal demands?

Are the products and services protected by patents, registered designs, trademarks or copyright?

What is the existing and potential competition?

What are the projected sales and profits and how are they determined?

The franchise agreement

Has the franchisor provided disclosure documents in accordance with the mandatory Franchising Code
of Conduct?

What is the term of the franchise?

Is there an option to renew? If so, are there any restrictions? What additional fees are payable?

Does the franchise refer to a territory? Can others operate in your territory or poach your clients?

Is there a requirement to sell a minimum amount of products and services to keep operating the
franchise?

Can you sell the franchise to someone else? If so, are there any restrictions?

Can you continue in the same business after selling the franchise or following its termination?

Can the franchisor terminate the franchise? If so, under what conditions?

Is a royalty or commission payable to the franchisor?

How much must be paid up front? What do you get for this? What are the conditions?

How much is the ongoing franchise fee? Are there other fees for advertising or training?

What impact does GST have on the franchise fees?

The franchise business premises

Does the franchising agreement include the leasing of business premises?

Who holds the lease over the premises, you or the franchisor?

Can the lease be terminated while you continue to hold the rights to the franchise?

What are your rights and obligations under the lease agreement?

Who owns the fit-out and other inclusions in the leased premises?

Financial considerations
Apart from the cost of the franchise itself, what will be the cost of buildings, plant and equipment,
fixtures, fittings and stock?

Is the product and equipment being offered at a fair market value?

Have you considered the best way to structure your business for tax and legal purposes (e.g. a company,
partnership, sole trader or trust?)

Do your estimates of wage costs take into account holiday entitlements, overtime payments, the need
to cover absent staff and superannuation obligations?

Have all overhead costs been included in your financial calculations?

Will the business provide you with a fair return on your capital outlay, your personal effort and risk?

The three primary forms of franchises are:

Manufacturing Franchises – Manufacturing franchises are given licences to produce services and goods
with full use of the brand name. You will find that many food and drink companies use this form of
business, as do many wholesalers.

Product Distributor Franchises – Product distribution franchises are when a franchisor gives permission
to franchisees to sell their branded products and offers them a licence to use the logo without ongoing
support running their business. This is closely related to a seller/supplier kind of relationship, with the
significant difference being it’s all branded.

Business format franchises

The most common type of franchise is the business format franchise. This type of franchising facilitates
the expansion of the franchiser business by allowing individuals to buy a business with an established
brand name. New business owners will often be supported throughout the initial business stages and
will continue to receive support in running their business. In return for the offered support, access to
experienced professionals, and the right to use the business name and trademarks, the new business
owner is obligated to pay a royalty fee to the franchiser on a regular basis.

A franchise agreement grants franchisees the legal right, for a fee, to operate a single franchised
business, per the terms as outlined in the agreement
The types of franchise agreements include:

SINGLE UNIT FRANCHISE

Single Unit Franchise (or Direct Unit Franchise) is the most traditional and historically the most common
form of franchising. Franchisor grants to an entity (the franchisee) the right and obligation to establish
and operate one franchise. The franchisees have to invest their own capital and apply their own
management skills (generally hands-on).

MULTI UNIT FRANCHISE

Franchisor grants to an entity (the multi unit franchisee) the right and the obligation to establish and
operate more than one franchised unit. The multi unit franchisee agrees up front to open a specific
number of locations during a defined period of time. The multi unit franchisee must have the financial
and managerial capability to develop multiple units itself.

AREA DEVELOPMENT FRANCHISE

This type of franchising arrangement is similar to the multi unit franchise- the franchisor grants to an
entity (the area developer) the right and the obligation to establish and operate more than one
franchised unit. The area developer agrees up front to open a specific number of locations during a
defined period of time within a defined area.

MASTER FRANCHISE

Franchisor grants the right to an entity (the master franchisee) for a specific country, region or
continent, empowering the master franchisee to provide the full range of products and services of the
franchisor through sub-franchising, in just the same way that the franchisor runs its own business. The
master franchisee, in addition to having the right and obligation to open and operate a number of
locations in a designated area, also has the right (and sometimes- obligation) to recruit other
franchisees. In effect, the master franchisee becomes sort of a franchisor to those franchisees who join
the system through its master franchise.

Elements included in a franchise agreement

Identifying information for both parties;

Confirmation of ownership of intellectual property and licensing terms;

Rights granted to the franchisee;

Standards and obligations of the franchisor and franchisee;

Length of the agreement and options for renewal;

Royalties, fees, and other expenses of the franchisee;

The territory in which the franchisee will/is permitted to operate and a statement of whether or not
those rights are exclusive;

Site ownership, selection, and approval requirements;

Building and design standards and renovation or update requirements and schedules;

Training and operational support to be provided by the franchisor;

Insurance requirements and indemnity provisions;

Operational and record-keeping requirements;

Advertising benefits and/or requirements and related fees;

Approval and other requirements related to events, sponsorships, and other engagements;

Rights of the franchisor to inspect facilities, records, or other property for quality control and assurance
purposes;

Successor rights, rights of first refusal, and other provisions regarding transfer or sale of the property or
business;

Requirements and accommodations related to supplies and materials;

Rights, conditions, and causes for termination of the agreement;

Processes for dispute resolution/requirement of arbitration; and

Reference to the laws governing the agreement.