FAQ's FOR FRANCHISEES

Are there any laws to regulate franchising, and if so, what are they?

Franchising in Australia has been regulated by the Franchising Code of Conduct since July 1, 1998, which is administered through the Australian Competition and Consumer Commission (ACCC).

The Code provides for a number of franchisee protection mechanisms including:

  • Mandatory disclosure of information from the franchisor, including financial details, directors’ interests, franchisee list, and litigation information;
  • Seven-day cooling-off period after signing the contract;
  • Recourse to mediation in the event of a dispute;
  • Free association of franchisees;
  • And others.

A prospective franchisee should read the Code prior to buying a franchise in order to understand their rights.

Do I need a license to become a franchisee?

There is no specific licence required to become a franchisee.

However, some franchise systems may perform tasks or duties, which in themselves require special licences or permits.

These licences or permits may be obtained via the franchisor, or by direct application to the appropriate licensing body (usually local, state or federal government departments).

How can I tell if a business is a franchise?

There is really only one way to find out if a business is a franchise – ask! If the business appears to be part of a chain, ask the local store operator, or contact the state or national office. You can also review the Franchise Council of Australia Member’s List. If the name of the franchise you are looking for does not appear here, check with your local FCA office in case they are in the process of applying. The Franchise Council recommends that potential franchisees ensure they deal only with members of the Franchise Council.

How do I know I am dealing with a reputable franchisor?

Potential franchisees should always ask for proof of membership of the Franchise Council of Australia (FCA), when dealing with franchisors. The Franchise Council of Australia is committed to best practice in franchising, and encourages all franchisors to aspire to the highest possible standards of franchising conduct. A list of members appears on this site. If a franchise system you are interested in does not appear on this list but states they are a member, check with your local FCA office.

How long does a franchise last?

The period, or term, granted under a franchise agreeement will vary from one franchise system to another. Franchise terms may be as short as one year, or at the other end of the scale may be granted in perpetuity. Generally however, most franchises are granted for three or five year terms with an option to renew for a corresponding period. Individual franchisees who wish to exit their business generally need not wait until their franchise term is completed, and can sell the business at any point during the franchise in most cases. On the renewal of a franchise agreement, the franchisor is again required to provide disclosure information, and franchisees should again obtain legal advice, especially if there are changes to the franchise agreement for the renewal.

How much does a franchise cost?

Prices for franchises vary greatly from one franchise system to another, and even within franchise systems themselves. Service franchises, which mostly do not require fixed shopfront locations, and can be operated on a mobile basis, usually from home, may cost from $5,000 to $50,000. Retail franchises, which mostly require a fixed shopfront, shopfittings, stock, etc, may cost anywhere from $50,000 to $250,000 or more. Prices vary according to the size, scope and complexity of the franchise on offer, the amount of technical expertise and/or equipment required to run the business, and the amount of stock required, among other factors. Existing franchise businesses for sale may not be the same price as new franchises for sale. Factors such as goodwill, depreciation of equipment and fittings, stock levels, and lease terms may also come into play.

How much money will I need to borrow?

This really depends on the establishment cost of the franchise, and your estimated working capital for your first three to twelve months of business. Borrowing to buy a franchise is now fairly specialised, and can be quite different to borrowing to buy a stand-alone small business. A number of financial institutions offer franchise business loans where the franchise system itself may be taken into account as factor in the loan application, potentially reducing the amount of real estate security required, or reducing the interest on the loan.

Should I talk to other franchisees?

Absolutely. A list of franchisees should be included as part of the disclosure information franchisors must provide by law. Contact several franchisees, especially those who are in locations near the one you are considering. Introduce yourself, be brief and respectful of their time as they still have businesses to run. Use your own judgement about the information that is provided, and bear in mind that should you proceed, these franchisees may well be your future colleagues.

What are fees and royalties?

The terms are often used to mean different things by different people. A fee can include the up-front amount paid to the franchisor for the use of their name, know-how, operating systems, etc. This is one component of the overall start-up cost of a new franchise. Ongoing fees (or royalties) are usually paid to the franchisor for providing ongoing business, management and technical support, etc. This fee may be fixed as a percentage of the franchisee’s turnover, which may vary as trading conditions change. Alternatively, a flat fee may be levied every month irrespective of turnover. No two franchise systems may have the same fee structure, and some may use a combination of fixed and flat. Fees are most often paid monthly from the franchisee to the franchisor. In addition to the management fees levied by a franchisor, franchisees may also be required to pay into a central advertising or marketing fund, and this may also be done on the basis of percentage or flat contributions on a weekly, monthly or quarterly basis.

What happens if I have a dispute with my franchisor?

If you have a dispute with your franchisor, you need to identify the underlying issues behind the dispute and attempt to resolve these by mediation. Disputes may occur from a misunderstanding of an aspect of the franchise relationship, which is outlined upfront in the franchise agreement. Franchisees and franchisors join together in a commercial marriage in which both become stakeholders in each other’s businesses and future commercial success. Under the Code, disputes should be settled by mediation, using a mutally agreed third party as a mediator, if no agreement can be reached by direct negotiation. In most cases this will result in a mutually acceptable compromise to solve the problem, and enable the relationship to continue. If you are in a franchising dispute, the Australian Small Business and Family Enterprise Ombudsman can provide free support including information on the Franchising Code of Conduct, options to resolve your dispute and access to mediation services. The Franchising Code of Conduct is a mandatory code that applies to all businesses involved in a franchise agreement. The Code also describes the behaviours expected of franchisees and franchisors and includes a process for managing disputes. The Code states that parties must act in good faith. This means parties must act honestly, and not arbitrarily, with each other and cooperate to resolve the dispute.

What is a franchise agreement?

The franchise agreement is the contract which joins you and the franchisor in business together. Franchise agreements can vary in length depending on the complexity of the business. They outline the rights and obligations of the franchisee and the franchisor under the franchise arrangement. Franchising is successful because a “business formula” is developed and tested by the franchisor before being franchised. It is important therefore that the franchise agreement allows the franchisor to protect that “formula”, while at the same time providing for future innovation and development. For this reason, the franchise agreement may appear to be in favour of the franchisor. It is essential to obtain qualified and experienced legal advice before signing any franchise agreement. It is also recommended that any potential franchisee who is considering investing their life’s savings into a franchise business should also read the agreement themselves (in addition to their lawyer) to gain a better insight into the nature of their future franchise relationship. See the FCA’s Member Directory for a list of legal advisors.

What is the best franchise for me?

Franchises are like clothes – what you like may not be to everyone’s taste and vice versa. Different individuals have different likes and dislikes, which is why buying a franchise is very much a lifestyle decision. The franchise that you choose should be consistent with your current or chosen lifestyle, and this should be among your primary considerations (along with price, location, growth potential, etc), when buying a franchise. Your business choice should be discussed carefully with your immediate family, particularly if your decision may have an impact on them. In the end, only you can make the decision on what is the best franchise for you, and the process that you apply to this and the relative importance you attach to the variables involved will be unique to your situation alone.

Where do I go for advice?

In the course of buying a franchise, you will need specialised legal, financial and accounting advice that can only be provided by firms or individuals with extensive franchising experience. The FCA run many seminars and workshops around Australia, and these are also very useful to learn more about specific aspects of franchising. For a list of events and locations, please see the Events section of the FCA website.

 

AUSTRALIA'S LARGEST FRANCHISEE SURVEY FINDINGS 

The FCA has recently launched the final report of Australia’s largest franchisee survey. With over 1,000 responses, it is the largest single survey of Australian franchisees undertaken.

The key findings include:

✔ The 2021 Australian Franchisee Survey Report is based on responses from 1,007 franchisees representing 83 Australian franchise systems and evidencing significant diversity.

✔ The survey sample reflected: Australian franchised businesses were operated by men (69%) and women (29%) (note: in many of the male operated businesses, a woman partner may also jointly run the business’.

✔ Whilst the majority of respondents (57%) were born in Australia, more than 40% were born overseas with India the second most common place of birth at 15%, followed by China 7% and the UK at 3%.

✔ A high level of education was evident across the population of franchise owners with 18% holding a tertiary degree and a further 27% holding a Post Graduate Qualification. More than 50% of respondents indicated either High School (22%) or a Diploma / Certificate (30%) as their highest level of education.

✔ A low level (4%) of respondents indicated they had previously served in the Australian Defence Forces and the majority of ex-defence force personnel owning franchises were involved in non-food businesses with the highest representation found in service and maintenance franchises.

✔ The vast majority (73%) of franchise units were owned by single operators. A further 20% of respondents indicated the operation of 2-3 units and 7% indicated the operation of 4 or more units for their franchise system.

✔ The survey reflected that 33% of respondents had commenced their business in the last five years (2017-2021). A further 30% commenced their business between 2012 and 2016 and 37% had now been operating their business for more than ten years.

✔ Responses indicate that franchises are typically operated by mature age owners with 76% of respondents aged 40 years or older.

✔ Franchised businesses are a significant employer in the Australian economy. The employment of more than 2 people was indicated by 81% of respondents. Single operators accounted for 19% of respondents. Almost half of all respondents (48%) indicated their business employed 2-10 people with a further 34% reporting their franchised businesses employed more than 10 people.