Buying a franchise

Franchising is a business model that allows one business to operate under the established brand of another business and to sell its products and/or services for a specified time period.

Franchising can be an excellent way to operate a business and is an alternative to setting up your own business. However, it is important to carefully consider all your options before buying a franchise and to seek advice from an experienced business adviser, accountant or lawyer.

Franchising in Australia is regulated by the Franchising Code of Conduct.

Before choosing a franchise you should:

  • learn about franchising and what is involved
  • understand the Franchising Code of Conduct
  • understand your rights and responsibilities under the Code.

TIP:Take advantage of the free, online education programs for people considering buying a franchise. The Pre-entry Franchise Education course and the Franchise and Small Business Survival eClass are available from Griffith University’s Asia-Pacific Centre for Franchising Excellence.

Franchising

There are three types of franchise:

  • Business
    This is the type people are most aware of. As the franchisee you have the right to use the franchisor’s intellectual property in your business. An example is a fast food outlet.
  • Product
    This is where the franchisee sells the franchisor’s product from a wholesale or retail outlet. As the franchisee you would be given exclusive rights to sell the product within a specific area. An example is a motor vehicle dealership.
  • Processing or manufacturing
    In this model the franchisee manufactures the product. The franchisor provides an essential ingredient or ‘know-how’ to the franchise. An example is the soft drink industry.

The cost of buying a franchise will depend on which one you select. You will be expected to pay an initial fee and an ongoing royalty fee weekly or monthly, or based on turnover.

Buying and running a franchise has similar tax implications to other small businesses. Refer to the Australian Tax Office for more information about franchising and tax.

You will also need to consider how you will finance buying the franchise; franchisors rarely fund prospective franchisees.

Advantages and disadvantages of franchising

Some of the points to consider are listed below.

Advantages

  • Association with an established brand, reputation, product or service.
  • Assistance with lease negotiations, site development, and shop fit out.
  • Assistance with buying equipment.
  • Initial management training and ongoing support.
  • Advertising and marketing support.
  • Access to established standard procedures, operating manuals and stock control systems.
  • Access to financial systems.

Disadvantages

  • Less autonomy when making business decisions (franchisees generally have to operate according to a standard operating manual).
  • You can only operate in a restricted area.
  • Paying ongoing fees to the franchisor.
  • Less control if you decide to sell your franchise; you will be required to follow certain procedures, including having your buyer approved by the franchisor.
  • Restraint of trade provisions (limiting the actions you can take) when the franchise ends.
  • At the end of the agreed period the franchisor is not required to renew the franchise, in which case the business and its goodwill goes back to the franchisor.

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Franchises and retail leases

Most franchisees will need to lease commercial premises in which to operate. Before signing a lease make sure that you understand your rights and obligations.

Seek professional advice before committing to the lease or signing a lease agreement.

TIP:A poorly negotiated lease could cost you a lot of money, particularly if your business does not succeed and you need to get out of the lease. Read our publication: Leasing business premises for more information or contact one of our specialist advisers.

Franchising Code of Conduct

The Franchising Code of Conduct (the Code) forms part of the Competition and Consumer Act 2010 and is regulated by the Australian Competition and Consumer Commission (ACCC).

The Code provides protection for franchisees in relation to:

  • disclosure documents
  • cooling off periods
  • the management of marketing funds
  • dispute resolution.

Before entering a franchise agreement, you should be provided with a copy of the:

  • Code
  • disclosure statement
  • information statement
  • franchise agreement.

Make sure that you conduct due diligence of the franchise and seek professional advice from an experienced business adviser, accountant or lawyer.

Evaluating a franchise

Before committing to a franchise it is a good idea to investigate the:

  • operating system
  • franchisor
  • territory
  • industry.

Read more about evaluating a franchise.

More information