A franchise is a business arrangement which allows a person or organisation to trade under the name of an already established business. In Australia franchises are everywhere and are a major part in the way people live. Franchises can be seen in all facets of daily life including where you shop, where you fill your car with petrol, where you eat and even where you drop your kids off for day care.
It is only natural then that when a person looks at starting their own business one of the first thoughts that they have is whether they should open a store connected to a franchise. Before jumping into a franchise agreement however have a think about these seven points:
- You’re not buying your own business and you are not your own boss: People think that when they enter into a franchise agreement that they then own that store and everything in it. Unfortunately that isn’t necessarily the case and you are only in fact purchasing the right to use that franchise’s name and system of operating for a specified period of time. Upon the conclusion of that time frame you will either have to renew that agreement, close up or be refused a new agreement by the franchisor. It is also a common misconception that when a person opens a franchise store that they will be their own boss. This is in fact incorrect with the franchise company having a large say in how the business operates.
- You need to be aware of what things are your responsibility and what things are the responsibility of the franchisor: Each franchise agreement is different and great care should be given in understanding who is responsible for what. Particular attention should be given to who is responsible for training, marketing in the local area and anything else that is relevant to the franchise. It should also be noted that operating a chain in a franchise is hard work with long hours and the same stresses that would be placed on an independent business owner.
- Be aware of the total start-up costs: Be aware of what your total start-up costs will be including the franchise fee, fitout costs, professionals fees (such as lawyers and accountants), the purchase of stock and enough money to support the business in the initial months.
- Be aware of what demands the franchisor can make and how much you will be required to pay them throughout the agreement period: You should check the agreement so that you are aware of any uniform standards, demands for training and updating of the fitout of the business premises. You should also be aware of how much money will be owing to the franchisor and their fees that will be owing under the agreement.
- Know your territory: A franchisor will not always guarantee you exclusive territory and they will be at liberty to grant further franchises to people in a location close to your own.
- Be aware that you are not necessarily going to make a profit and that there is no guarantee of success: Just because it is a national or international chain or that you have the support of the franchisor doesn’t mean that you are guaranteed success. Just like any business there will be risk and those risks need to be considered before entering into any franchise agreement.
- Seek professional advice: It is absolutely crucial to seek financial and legal advice before entering into any franchise agreement. You should ask whether you have enough money to start up and operate the business. You should also seek clarification on the terms of the agreement and what your ongoing obligations are going to be under the agreement. You should also be informed on anything else that may impact the operation of your franchise store.
If you are considering entering into a franchise agreement, we suggest you obtain legal advice on the terms of the agreement. Please do not hesitate to contact Lynn & Brown Lawyers who can assist you further.
About the authors:
This article has been co-authored by Aaron Plenderleith, lawyer, and Steven Brown, director at Lynn & Brown Lawyers. Aaron is admitted to practice law in Western Australia and practices in criminal law, commercial and Wills and Estates. Steven is a Director and has over 18 years’ experience in legal practice and practices in commercial law, business law and estate planning.