Franchising is a $144 billion sector in Australia.
Franchising adds a layer of experience and certainty to a new
business venture that is not present in a non-franchised start-up.
It is similar to purchasing a new business, but without the
responsibility of taking over existing hidden liabilities.
The Franchisor is expanding their business by allowing the
Franchisee to use their brand, reputation and business model for a
fee paid by the Franchisee. The Franchisee is paying that fee to
start a new business based on a model with a history of success but
is agreeing to be restricted in the way in which the business is
run to limit the chances of failure.
A Franchisor intends to offer a Franchisee a simple model for
the Franchisee to follow and achieve the Franchisor's success.
The Franchisee intends to receive a properly structured business
with a strong reputation that will be quickly successful. If this
is the case then the success of the Franchise should be primarily
determined by the business concept, market forces, timing and the
effort of the parties.
However, even with the best of intentions, not all Franchisees
or Franchises will succeed as our Franchise Lawyers often see.
Failure can come in many ways, and Franchising is not without its
risks. Franchisees should remember that without significant
'skin in the game' the Franchisor may be invested in the
success of the Franchise, but not in its failure. Similarly,
Franchisors should remember that a Franchise's success will be
determined by the motivation and ability of its Franchisee –
a Franchise is rarely successful solely because it is based on a
good model – it is the commitment of the Franchisee to its
Franchisees and the execution of that model that determines the
Where things go wrong are often in the promises that are made
that do not bear fruit. This is why open communication is essential
to establish a Franchise that is successful for the Franchisor and
An advantage in purchasing a Franchise is that the Franchising
Code of Conduct (as replaced on 1 January 2015) governs the
relationship between Franchisor, Franchisee and prospective
Franchisees. This new Code is quite beneficial to protecting
Franchisors, Franchisees and prospective Franchisees, but is only
useful to the extent that the Franchisor, Franchisee and
prospective Franchisee know and understand their rights.
For example, a prospective Franchisor is obliged under the Code
to create a disclosure document relating to its Franchise that
gives a prospective Franchisee current information that is material
to the running of the Franchised business to help the prospective
Franchisee to make a reasonably informed decision about the
For the Franchisor, the disclosure document is the first step in
establishing the model to success that they wish to build and puts
in one place the promises about the chances of success of their
Franchise. Getting the disclosure document correct ensures that the
Franchisor is both able to sell their model and comply with their
obligations under the law. There are serious penalties for
Franchisors for non-compliance with the Code and its disclosure
obligations (for example see this blog on overselling your
Franchise), which is why Franchisors should receive legal and
financial advice on preparing their disclosure document.
For the Franchisee, the disclosure document is their first
chance to "look under the hood" of the model and get an
idea how replicable the Franchisor's success will be. The
Franchisee who knows their rights will be able to review a
disclosure document and understand what powers they will have
should the business model fail as a result of inaccurate or
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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