FAQ’s – Franchising

Here are some of the most frequently asked questions about franchising. 1. What is a Franchise? A franchise is a business that operates under a system. It involves one party (the Franchisor) granting another party (the franchisee) the right to operate a “replicated” business, – usually under a recognised registered name, and to use established management methods, marketing systems, and operating procedures. In return the franchisee commits to paying the franchisor an initial fee, and further ongoing fees (royalties). The Franchisee also agrees to comply with franchise systems, policies and procedures. 2. What is a Franchisor? The person or company who owns the operating systems, trademarks, and procedures. 3. What is a Franchisee? The person or company which pays the Franchisor for the right to use the systems, products and processes which are owned by the Franchisor. 4. What are Royalties? Royalties are paid for the continuous use of a piece of work, such as the payments made to an author for a book that is on the market. These expenses are in addition to any one time initial fees. The payments are usually lower than upfront fees since they are a continuous regular expense. With regard to franchise royalty payments, the franchisee earns daily sales as their main source of revenue. The regular monthly income that the Franchisor earns is based on royalty payments from each franchisee. 5. What is a Franchise agreement? The franchise agreement is the cornerstone document of the Franchisee–Franchisor relationship. It is this document that is legally binding on both parties, laying out the rights and obligations of each party. For an agreement to comply under the code it must contain four elements: • an agreement between the parties, which may be written, oral or implied • substantial or material association with a trademark, advertising or commercial symbol • a grant by the Franchisor to the franchisee of the right to carry on the business • agreement by the franchisee to pay the Franchisor, or an associate, an amount in return for the grant of these rights and usages. 6. What is a Disclosure Document? A “Disclosure Document” is the document (or documents) which provide detailed information about a franchise and the Franchisor. Disclosure Documents are required to be given by the Franchisor to potential and existing franchisees, at various points in the Franchisor/Franchisee relationship. 7. What is the “Franchising Code of Conduct”? The code has the force of law and requires Franchisors to disclose specific information about a franchise to both potential and existing franchisees. It regulates the dealings between both parties in a franchise relationship and provides for dispute resolution mechanisms. For a copy see http://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct 8. Do I have to get professional advice before entering into a franchise agreement? Yes. It is important to get professional legal and financial advice before you enter into a franchise agreement. Acquiring or selling a franchised business is a significant decision and often involves a significant financial decision and commitment, so having good independent advice is highly recommended. When acquiring a franchised business, you will need to provide the Franchisor with a statement saying that you have sought advice from a legal adviser, business adviser and/or accountant. If you choose not to seek this advice, you will have to provide your Franchisor with a statement saying that you have been told you should seek advice, but you elected not to do so. These documents must be provided to the Franchisor before entering into any franchise agreement. 9. Is there any restriction on who I can sell my franchise to? The Franchisor is able to determine who is a suitable operator of the business. When selling a franchised business, it is necessary for the franchisee to request the franchisor’s consent for a transfer of the franchise. This must be done in writing. If the Franchisor does not respond within 42 days, consent is taken as having been granted. The Franchisor cannot unreasonably withhold consent. Often there are conditions attached to your transfer. Such as a “transfer or assignment fee” Ian Salter Specialist Franchise Business Broker Benchmark Business Sales & Valuations