Many people consider franchising to be a great alternative to starting up an independent business as there can be less risk involved in entering into an established franchise system than starting a business from scratch; however, franchising comes with its own set of risks.
There are a number of simple steps that a prospective franchisee can take in order to considerably reduce those risks.
1.Have a close look at the numbers
Many franchise agreements require payment of a royalty which is calculated as a percentage of the franchisee’s gross revenue. This means that the franchisee will be required to pay the franchisor regardless of whether the franchisee is making a profit and/or drawing a basic wage from the business. Before entering into a franchise agreement, it is important to ensure that you will be adequately rewarded for your hard work. An accountant with experience in franchising will assist you in understanding the franchise documents and any financial records supplied by the franchisor.
2.Speak to franchisees
Often, the best source of information on a franchise system is from existing franchisees. Under the Franchising Code of Conduct (“the Code”) franchisors are required to provide contact details of existing and past franchisees. We recommend contacting a number of franchisees (both current and past) to find out about their experience in the system. It is helpful to discuss issues such as – supply of product, the level of franchisor support, any issues they have had with the franchisor and whether they generally consider the benefits of being part of the system to justify the cost.
3.Have the documents reviewed by an experienced franchise lawyer
Under the Code, franchisees are required to obtain independent legal advice (or provide a signed statement that they have elected not to) before entering into a franchise agreement. Although the Code does not require that advice be obtained from a specialist franchising lawyer, a specialist franchise lawyer will assist you in understanding the terms of the agreement, seeking to negotiate amendments in relation to any critical issues and ultimately giving you the information you need to make an informed decision about whether the system is right for you.
4.Familiarise yourself with the system
Operating a franchise is very different from operating an independent business, for a franchise relationship to be successful; both parties need to understand the expectations of the other. As a franchisee, you will generally be required to operate the business strictly in accordance with the franchisor’s requirements. It is therefore important that you ask the franchisor as many questions as you need to in order to satisfy yourself that you are prepared to operate the business in accordance with those requirements.
5.Understand your rights under the Code of Conduct
The Code is largely designed to protect the rights and interests of franchisees. Franchisees should understand their rights under the Code, when entering into a franchise agreement and throughout the term of the relationship. It is particularly useful for franchisees to familiarise themselves with the dispute resolution provisions under the Code.
If you require assistance regarding entering into a franchise agreement or any other franchising matter, please contact Melissa Strain of our office.
Our Franchising department can also assist you with:
- Reviewing and advising on franchise documents;
- Drafting Franchise Agreement and Disclosure Documents;
- Dispute resolution for franchisees and franchisors.
To ask Melissa a free legal question in regards to franchising or discuss the above services offered, please complete the question form here.