FAQ on Franchising

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QUESTION: We have a disagreement with our franchisor. We do not agree with the way the franchisor uses our marketing budget - we think there should be more local advertising. Is there anything we can do?

ANSWER:

The marketing budget to which a franchisee contributes is usually set out in the disclosure document and franchise agreement.

The actual way in which the marketing budget is spent is determined generally by the franchisor and is not usually for local area marketing which is left to the franchisee to pursue separately.

A franchisee should raise the issue of concern firstly with the franchisor and see if the franchisor is willing to deal with the matter. Put your issues in writing and invite a written response. Review the response in light of the obligations set out in the franchise agreement and operations manual.

If the matter is not resolved you can pursue the issue via the dispute resolution provisions under the Franchising Code of Conduct. Clause 28 of the Franchising Code of Conduct sets out the general dispute resolution provisions.

You could also seek legal advice to identify the issue and whether you are within your rights to take the matter further.

This response was provided by Wisewoulds Lawyers

QUESTION: I am thinking of buying a franchise. I was wondering: How do I know if a company is financially sound? What type of information do franchisors have to supply?

ANSWER:

Franchisors must provide the following information in their disclosure document:

- A statement as at the end of the last financial year, signed by at least one director of the franchisor, whether in its directors' opinion there are reasonable grounds to believe that the franchisor will be able to pay its debts as and when they fall due.

- Financial reports for each of the last two completed financial years.

However, financial reports do not have to be provided if

- The statement by the director is supported by an independent audit provided by a registered company auditor within twelve months after the end of the financial year to which the statement relates and a copy of the independent audit is provided with the statement.

In my opinion, the information provided by the franchisor needs to be carefully assessed.

- The fact that a company states that it is able to meet its debts as and when they fall due does not necessarily mean it is financially sound, and

- The financial information provided in the disclosure document may be up to twelve months old, and a lot may have happened in that period.

You should have your accountant review the information that the franchisor does supply and if necessary ask further questions of the franchisor about its financial position. You have the right to ask additional questions and to seek additional information from the franchisor.

This response was provided by McLean Delmo Franchising

QUESTION:  I am starting a new business venture - and am interested in franchising in the near future. How does one go into franchising? What is the first step I need to take?

ANSWER:

There are some very simple questions to ask yourself if you are thinking of becoming a franchisor. We often send these out as a 'thought starters' to business people that are considering the franchise adventure. Some of these questions will be easy to answer, while others a little more confronting. To be in the zone you'll need to have at least considered an answer to all of them.

If yours is a 'new business venture' then considering franchising, 'in the near future' could be a little harder than expected. The key to being able to sell any franchise business is that the model has been proven in the marketplace. As a potential franchisee I want the security and piece of mind that the business actually works, and the easiest way for me to do that is to have seen it work, in most instances for at least 12 months so I can see the annual cash cycle of the business. In some business cases, dependant on the business category, we would suggest you have multiple test outlets running to also prove the model in different locations.

Well here are a few questions to get you started.

•  Are you familiar with the Franchising Code of Conduct?

•  Have you run a pilot business?  If so how long has this business been running for? (List each outlet if there is more than one).

•  Have you conducted feasibility studies, can you prove your product or service has the potential for growth?

•  Have you considered how many territories/outlets you may have?

•  Are you considering expanding into other states, overseas?

•  Have you discussed Franchising with a Franchise Lawyer and Franchise Accountant?

•  What IP protection do you have in place?

•  Have you considered what how you will structure your company?

•  Have you considered how many years the term of your Franchise Agreement will be?

•  Have you considered how much your royalty fees will be and if these will be fixed or percentage based?

•  Have you considered what type of territory you will have; i.e. exclusive, marketing etc?

•  Are you intending to have a marketing fund and if so have you considered what the royalty fees will be and if it will be fixed or percentage based?

•  If you are a retail outlet have you considered who will hold the head lease?

•  If you are a retail outlet who will be responsible for finding a suitable suite?

•  What are your current supply arrangements?

•  Do you currently manufacture any of your own products?

•  What documentation do you currently have in place;

•  Operations Manual

•  Sales and Customer Service Manual

•  Marketing Manual

•  Other, please specify

•  Do you have a current business plan, if so does this incorporate the transition to a franchise model?

•  Have you considered how to administer the franchise fees and reporting process?

•  What staff do you currently have in place and are you intending change this under a franchise model?

•  What sort of induction training do you currently have in place or have you considered?

•  Have you considered how you will recruit new franchisees?

•  How would you describe your current company culture?

•  Are you willing to make the transition from being a business owner to a franchisor (people person).

•  Do you have adequate capital to fund the initial stages of franchising?

•  What is your point of difference against your competitors?

•  Are you willing to share your success with others (franchisees).

This response was provided by The Edge Corporate Strategies

To find more tips and advice from Troy Hazard just click here

QUESTION: I would like to buy a small franchise and work in it full-time.  This franchise is like a 9 to 5 job and it is the kind of work I think I would like to do.  I have the finance worked out already.  The only problem is that my family think I'm crazy.  Should I just 'jump in'? 

ANSWER: 

You should never "jump" in to anything, and buying a business is a life altering decision whether it succeeds or fails.  There are many things you need to look at and dozens of questions you need to ask the Franchisor and the existing Franchisees.       

This response was provided by Enterprise 21

QUESTION:   I run my own small business from home. I started it from scratch and have a couple of ideas for how to expand my base. How do I know if it is a good idea for a franchise?  How do I go about putting preliminary systems in place?

ANSWER: 

Just about any type of business can be franchised, providing it has some basic characteristics:

• Your business needs to be credible. This means it needs to have a proven track record and experienced management
• Your business must have sustainable differentiation. This means it needs to be adequately differentiated from its competitors and this difference needs to create a sustainable competitive advantage
• You need to be able to teach others to run your business. This means systems need to be in place and operating procedures need to be documented. Another person should be able to learn how to operate your business within three months
• It must be transportable to other locations, or give a unique opportunity to build a defendable customer base, that gives sufficient scale and upside to a Franchisee
• Your business needs to be proven and profitable. This means it needs to generate a sufficient return on investment to justify the risk an operator would take (above 30%)

Checklist your business against these initially - if the answer is yes - then there is a good chance that you can consider Franchising.

The benefits to you will be

• You can earn profits without the risk of high investments
• You can expand and grow your business with your franchisee's finances and resources
• You do not have to concern yourself with the day to day operation of each outlet
• Your franchise outlets will tend to be managed by the proprietor, so they will be more highly motivated and are therefore more likely to be successful

What to do:

I always recommend having a strong vision of where you want to take the business - so you can start creating the right structure and culture now. Have a business plan that quantifies all the elements you need to get right to cater for that business and measure yourself absolutely against that before adjusting your strategy. And importantly:

• Seek proper professional advice from solicitors and business advisors
• Have a business plan ready to evaluate each Franchisee and to demonstrate the value they can create (and know the value you will be getting from a successful Franchise)
• Have the Franchise Agreement written by an experienced franchise solicitor
• Ensure that you do not have to concern yourself with the day to day operation of each outlet
• Take time to write the systems and process up clearly.
• Choose franchisees very carefully and slowly.

This response was provided by Commercial Insight Pty Ltd

QUESTION: My hubby and I have been given an opportunity to purchase a franchise in an area he has always wanted to get into. I was wondering what type of information is the franchisor obligated to provide before we make our decision?

ANSWER: 

Prior to entering into a Franchise Agreement or prior to a Franchisor receiving a non-refundable deposit relating to the franchised business, the Franchisor must provide a prospective Franchisee at least 14 days before entering into a Franchise Agreement, a Disclosure Document and a copy of the Franchising Code of Conduct.

The purpose of a Disclosure Statement is to provide a prospective Franchisee with current information that is significant to the operation of the franchised business in order to assist the prospective Franchisee to make an informed decision about the franchised business. The Disclosure Document must be set out in the form prescribed under the Franchising Code of Conduct and must contain the information required under the Franchising Code of Conduct about the franchised business.

The Franchisor may also provide you with some marketing information about the franchised business and copy of the Lease for the business premises. Normally the Franchisor will require you to sign a form, Confidentiality Agreement, prior to giving you the above documentation

This response was provided by Mason Sier Turnbull

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