FAQ’s – Franchising

FAQ’s – FranchisingHere 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. Itinvolves one party (the Franchisor) granting another party(the franchisee) the right to operate a “replicated” business, –usually under a recognised registered name, and to useestablished management methods, marketing systems, andoperating procedures. In return the franchisee commits topaying the franchisor an initial fee, and further ongoing fees(royalties). The Franchisee also agrees to comply withfranchise 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 theright to use the systems, products and processes which areowned 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 onthe market. These expenses are in addition to any one timeinitial fees. The payments are usually lower than upfront feessince they are a continuous regular expense. With regard tofranchise royalty payments, the franchisee earns daily sales astheir main source of revenue. The regular monthly incomethat the Franchisor earns is based on royalty payments fromeach franchisee.

5. What is a Franchise agreement?The franchise agreement is the cornerstone document of theFranchisee–Franchisor relationship. It is this document that is legallybinding on both parties, laying out the rights and obligations of eachparty. For an agreement to comply under the code it must contain fourelements:• an agreement between the parties, which may be written, oral orimplied• substantial or material association with a trademark, advertising orcommercial symbol• a grant by the Franchisor to the franchisee of the right to carry on thebusiness • agreement by the franchisee to pay the Franchisor, or anassociate, 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 theFranchisor. Disclosure Documents are required to be given bythe Franchisor to potential and existing franchisees, at variouspoints in the Franchisor/Franchisee relationship.

7. What is the “Franchising Code of Conduct”?The code has the force of law and requires Franchisors todisclose specific information about a franchise to bothpotential and existing franchisees. It regulates the dealingsbetween both parties in a franchise relationship and providesfor dispute resolution mechanisms. For a copy seehttp://www.accc.gov.au/business/industry-codes/franchising-code-of-conduct

8. Do I have to get professional advice before entering into a franchiseagreement?Yes. It is important to get professional legal and financial advice beforeyou enter into a franchise agreement. Acquiring or selling a franchisedbusiness is a significant decision and often involves a significant financialdecision and commitment, so having good independent advice is highlyrecommended.When acquiring a franchised business, you will need to provide theFranchisor with a statement saying that you have sought advice from alegal adviser, business adviser and/or accountant.If you choose not to seek this advice, you will have to provide yourFranchisor with a statement saying that you have been told you shouldseek advice, but you elected not to do so.These documents must be provided to the Franchisor before enteringinto 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 thebusiness. When selling a franchised business, it is necessary for thefranchisee to request the franchisor’s consent for a transfer of thefranchise. This must be done in writing. If the Franchisor does notrespond 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 “transferor assignment fee”Ian SalterSpecialist Franchise Business BrokerBenchmark Business Sales & Valuations