INSIGHTS: Thinking of buying a franchise?

March 24, 2014

Think about some of the most successful businesses in Australia and you will no doubt visualise the business name and the logo. These will often be referred to as the ‘trademarks’ of the business. If you are thinking of buying a franchise, then one of the key assets you will be buying is the right to use and trade under an established ‘brand’ or trademark with the goodwill and loyalty that comes from that brand.

In all franchise arrangements, the franchisor is the organisation offering its brand under a franchise, and the franchisee is the person or organisation that buys the right to operate a business under that brand or marketing system.

What are the benefits of buying a franchise?

In most cases you will be buying a business with established systems and processes, and you will have access to the expertise and knowledge of the franchisor as well as benefiting from the brand ‘name’, the reputation and the goodwill which attaches to that particular business and brand.

Buying a franchise means that you can establish your own business without having to go it completely alone.

What are the potential downsides of a franchise?

As well as buying the benefit of a particular brand, there is the risk that should the overall brand image be damaged in some way, for example, if you operate a food outlet franchise and there is an outbreak of food poisoning at another outlet in the network, your own business may be tainted by any resulting bad press and loss of business, even though you may have nothing to do with the outlet that caused the food poisoning.

Franchise start-up and ongoing costs can sometimes be high, and there can also sometimes be a high administrative burden imposed on the franchisee in terms of record keeping and reporting to the franchisor. Over time, some franchisees become frustrated by the inability to change the way the business operates, and feel constrained by the franchise itself.

You may work hard to build a valuable customer base, but at the end of your franchise agreement may not be able to sell your business on the open market if there is a ‘buy-back’ clause in the franchise agreement, giving the franchisor the right to buy the business you have established back from you at the end of the franchise. Often the price for the buy-back is fixed as at the time the original franchise was taken—this price may or may not reflect the added value you have created in the business.

The Franchising Code of Practice

The Franchising Code of Practice regulates the processes and requirements that must be complied with by a franchisor before a franchise agreement is entered into. It requires pre-contract disclosure of important information to you as a potential franchisor, and offers a 7 day cooling off period following signing of the franchise agreement.

You should seek specialist legal advice on the content of any franchise agreement and any associated agreements such as leases before signing them, and use the cooling off period to check the details of the arrangements and get out of the agreement if they are not what you first thought.

Contact Georgina Odell for advice on buying a franchise.