Buying a franchise is an alternative to starting an independent business. Franchising allows you to operate a business under the brand of another business. You (the franchisee) can sell the franchisor's products or services according to the franchise agreement for a specified period, in return for complying with the franchise agreement and payment to the franchisor.

Some franchises offer benefits, such as:

  • an established product or service
  • an existing reputation and image
  • a pool of resources to fund advertising
  • economies of scale when purchasing supplies.

Running a franchise business is different to running your own business:

  • you’re usually required to strictly comply with the operating procedures set down by the franchisor
  • you may be limited in the changes you can make to the franchise system without the agreement of the franchisor
  • the franchisor might make changes to the franchise system at any time but does not have to discuss them with all franchisees.

There are also risks in owning a franchise:

  • Franchise agreements often include termination rights in favour of the franchisor. The Franchising Code sets out processes the franchisor must follow to terminate franchise agreements, it doesn’t stop you from being lawfully terminated. You may lose your whole investment if the franchisor terminates your franchise agreement.
  • Like any business, your franchised business or the franchisor’s business may fail.
  • You can’t always resell or renew the franchise. This is important if you can’t make enough money to recover your costs before your franchise term finishes.
  • The franchisor can act in their own commercial interest. Even if this reduces the income of franchisees, it may not be against the law.

Before you buy a franchise

Thinking about buying a franchised business? The ACCC’s free online course Is franchising for me? is a great starting point. If you're doing early research or are about to sign a franchise agreement, this course will help people gain a better understanding of:

  • how franchising is different to an independent small business or employment
  • what might be in a typical franchise agreement
  • what ‘due diligence’ means, and why it’s important
  • some of the common issues in franchising
  • how to get help and what someone needs to know before deciding to buy a franchise
  • the main laws that apply to franchising.

The Franchise Disclosure Register is a free directory of franchisors available in Australia.

If you're thinking of buying a franchise, it can help you compare important information about different franchises, such as costs and contract terms and make informed decisions before entering into a franchise agreement.

Learn more about the Franchise Disclosure Register.

It’s important to get professional advice from an accountant, lawyer and business adviser with expertise in franchising.

Before you buy a franchise, consider the same issues as you would if you were purchasing or starting any other business. Do online research on the franchise system, know the market you are going to be operating in and understand how the business works. Also, consider the issues specific to franchises, such as what happens if the franchise or franchisor fails. The franchisor will act in their commercial interest. It is your responsibility to protect and act in your own commercial interests.

There are risks when running a franchise. If you buy a franchise business and it goes badly, you could lose all your money and any assets, such as your house that you have borrowed against. Franchising is very different to other types of business. You won’t have the same level of control compared to a business you run independently. Franchisors can usually control the products or services you offer, where they must be sourced from even if it you can get them cheaper somewhere else. As the franchise adjusts to meet changes in the market, the franchisor might make changes to the franchise system. A franchisor may be able to make these changes, even if you don’t agree with them.

Make sure you understand the costs of:

  • the upfront fees
  • establishing and maintaining the franchised business
  • any significant expenditure you might have to pay
  • franchisor insolvency.

Learn more about the risks of buying a franchise.

When you are buying a franchise, you’re often dealing with a sales person. Don’t be rushed into making a quick decision. When you are given new information or documents take the time to understand them, verify the information and get advice. If the franchisor tries to rush you, remember you can walk away. There will always be other opportunities.

1. Do your research and verification

You will need to thoroughly research and investigate the franchise system you’re considering buying into. This will help you make an informed decision.

To help you:

  • review all the documents provided to you, such as the information statement, disclosure document the franchise agreement and the Franchising Code
  • seek legal, accounting and business advice
  • verify the earnings information
  • check the franchisor’s financial position
  • complete a background check on the business/company on the ASIC Connect website
  • research the market for the product/service
  • lookout for scammers
  • if the franchise requires a site or lease carefully review any lease documents and get advice.

Ask questions

Some of the best information can be from those working in the business. Speak to current and former franchisees, and ask them questions such as:

  • Are they making a profit?
  • How many previous owners has the site had and for how long?
    • A high turnover of one site (known as churning) or across a system (known as burning) could be a warning sign about a franchise system.
  • Are there any hidden and unexpected costs?
  • What training and support did the franchisor provide?
  • What are labour costs, and what wage/salary did the franchisee receive?
  • Why did they leave the franchise system?
  • Were promises made by the franchisor kept?
  • Especially any profit or earning promises?
  • What happened at the end of their franchise agreement?
  • Could they renew the franchise agreement if they wanted?
  • Were they told about major changes before they happened?

If it’s too hard to contact former franchisees, or they don’t want to talk, consider this a big warning sign about the franchise system.

Think about potential unexpected expenses

Franchisors can impose significant capital expenditure on franchisees if certain conditions are met. For example, if some conditions are met a franchisor can make you pay for new equipment or to refurbish your store - even if it costs you a lot of money.

Conditions where a franchisor can require franchisees to incur expenditure include:

  • when it was disclosed to the franchisee in the disclosure document that they received before entering into, renewing, or extending their franchise agreement
  • where they have been agreed by the franchisee
  • when it will be incurred by a majority of franchisees and a majority of those franchisees approve the expense
  • where it was necessary to comply with legislative obligations.

2. Make sure you understand the franchising agreement

Buying a franchise means you’re buying the rights to run a business under a brand name. Often these rights are subject to conditions that are set out in a franchise agreement.

The franchise agreement is a legally binding document that details the rights and responsibilities of both the franchisor and franchisee. Once you enter into a franchise agreement, you’re legally committing to run the business according to the requirements set out in the franchise agreement and the franchise operating manuals. Often franchise agreements are written so they favour the franchisor, you’ll often have significantly more obligations than the franchisor. Sometimes this reflects franchising as a business model, and sometimes it is a bad business deal. It’s important to get advice to understand which one you might be signing.

Before you sign a franchise agreement, obtain as much information about the franchise as possible and make sure you understand the risks. As soon as you show a genuine interest in a franchise, franchisors must give you a short information statement outlining the risks and benefits of franchising.

At least 14 days before you sign a franchise agreement or make a non-refundable payment, franchisors must give you:

You can take more than 14 days to think about the offer, and you should not rush into a decision.

Before signing an agreement it’s important to understand what issues may arise at the end of an agreement. Some questions you might like to discuss with the franchisor, your legal adviser and talk to other franchisees about include:

  • Will the franchisor purchase unsold stock, marketing material, equipment and other assets?
  • Is the franchisee entitled to any compensation for goodwill in the business?
  • Will you be subject to any restraint of trade (or similar) clause?
  • Are you aware of the types of events that may lead to non-renewal or termination of an agreement? How would this impact you?

Learn more about what you need to do before entering into a franchise agreement.

You can terminate a new franchise agreement (including a transfer of a franchise agreement) within 14 days of whichever is the latter of the following events signing the franchise agreement, making a non-refundable payment or receiving required leasing information from the franchisor (where relevant).

Learn more about what to do if you change your mind after you enter into a franchise agreement.

A franchise agreement generally operates for a set period. Renewal of your agreement is likely to be subject to signing a new agreement or other conditions.

A franchise agreement may end due to expiry (non-renewal), termination or the franchise system ceasing to operate for any reason.

Find out how to end a franchise agreement and what you need to do.

Franchisees can propose to terminate their franchise agreement via a written notification at any time, to the franchisor. An ability to propose termination is not a right to termination. There are no limits on what reasons the franchisee may seek to terminate, however mandatory good faith obligations will apply.

Franchisors have 28 days to provide a substantive written response to the proposal. If the franchisor does not agree to the termination, they must include their refusal reasons. Franchisors that refuse a termination request could be seen to have breached the Code’s good faith obligations or to have engaged in unconscionable conduct.

Franchisors and franchisee can access alternative dispute resolution processes provided by the Code.

4. Understand your tax obligations

Franchisee businesses can operate under different business structures. Like any business, your structure, earnings and assets will determine your taxation obligations.

Ongoing franchise fees are often deductible in the year you pay them. You might be able to deduct other payments including training fees and loan interest from your taxable income. Check what you can deduct with your accountant.

When you buy, sell, transfer or terminate a franchise, taxes may apply.

5. Employing staff

Franchisees that employ staff have the same workplace responsibilities as other employers. It’s important to remember that if you’re operating a franchise in Australia, you must follow Australian workplace laws, regardless of where the franchise originated. You should consider:

  • minimum wages and awards
  • employee benefits such as long service leave
  • record keeping obligations
  • offences and financial penalties for breaches of workplace laws, including those who underpay employees, fail to keep correct time and wage records, fail to issue compliant pay slips or who force employees to repay wages.

6. Understand the leasing requirements

Your franchise may need to lease a commercial premise to operate. It’s important you understand your rights and obligations when signing a lease. You need to:

  • seek professional advice
  • know what is involved in the lease transaction
  • know who the lease is with (franchisor as the landlord or an independent landlord).

It’s important to ask questions about the lease before you sign the franchising agreement:

  • Does the franchising agreement include the leasing of business premises?
  • Who holds the lease over the premises, franchisee or the franchisor?
  • Can the lease be terminated while you continue to hold the rights to the franchise?
  • What are your rights and obligations under the lease agreement?
  • Who owns the fit-out and other inclusions in the leased premise?

The lease contract and the franchise agreement are two separate documents.