Buy a franchise

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.

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.

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.

Like any business decision, you should consider franchising carefully and follow the right processes. There are laws you must follow when franchising in Australia, including:

• Franchising Code of Conduct
• Australian Consumer Law (ACL)
• Fair Work Act
• Contract law.

Your franchise agreement is a contract, so you may have rights and obligations under contract law. Contract law is not written down in one place - it is made up of past court cases. Your legal advisor will help you understand your rights and obligations under contract law. If you occupy a premises it is likely you will be required to comply with a lease or licence. It is important to understand your obligations and what rights and obligations you may have under applicable retail legislation and council requirements.

As a franchisee, the Franchising Code details:

• your minimum rights and obligations
• the information franchisors must tell you before you sign
• some of the things a franchise agreement must contain
• the process for resolving disputes.

If something goes wrong after you sign the agreement, you may need to take your own legal action to enforce your rights. The Australian Competition and Consumer Commission (ACCC) enforces the Australian Consumer Law and the Franchising Code of Conduct. The ACCC takes action for breaches of these laws where it serves the public interest. The ACCC does not take action on your behalf if something goes wrong for your franchise.

These laws can’t guarantee your success – a franchise can fail, just like any other business.

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.

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.

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.