Scenario:
Fred and Jane have operated a successful business now for two years and over that time they have built a well known and marketable name together with a well developed system of operating their business. In considering how to expand their business they remember a number of people commenting that the business ought to be franchised. Fred and Jane cannot physically operate a large number of businesses themselves. Fred and Jane seek the advice of their business lawyer for further guidance.
Guidance:
A well developed brand and system for operating a business may be suited to franchising. Franchising is simply a method of replicating one business (or one way to do business) many times over.
The person who creates the business system and the branding is called the Franchisor. The person who acquires the Franchise is called the Franchisee.
Fred and Jane should ensure they lawfully own the business brand(s) including trading name, company name, domain name, patents, copyright, trade secrets, secret processes or formulae, trade marks (logo’s etc) before doing anything else (these are referred to as intellectual property). These form a very important part of the Franchise package that is acquired (licensed) to a Franchisee to operate their Franchise.
Fred and Jane are required by law (Franchising Code of Conduct, Trade Practices Act 1974 (Cth)), to prepare franchise documentation in particular forms so as to disclose fully to a prospective Franchisee all required information about the Franchise before any agreement is signed and becomes legally binding. Some of these requirements include a Disclosure Document, Franchise Agreement, ongoing Annual Audit Report of common Marketing Fund(s), annual updates to Disclosure Document, notices to prospective Franchisee to seek independent advice (ie. legal, financial, business).
Fred and Jane are also required to provide an operating manual and training to a prospective Franchisee.
Fred and Jane should also look to issue (and receive signed by prospective Franchisee) a Confidentiality Agreement prior to disclosing any of their business related information.
Fred and Jane must select their Franchisee’s carefully as the Franchise system is dependant upon the people operating the system.
Fred and Jane need to be aware that important changes are coming in relation to the requirements of by the Code. These changes are intended to be effective on and from 1 March 2008 and change some of the existing disclosure and related requirements.
A prospective Franchisee may be granted the protection of an exclusive territory from which to operate their Franchise and they may be granted the right to additional Franchises depending on the terms of the Franchise Agreement.
A prospective Franchisor (and Franchisee) should seek the advice of appropriately qualified persons including business solicitor, insurance advisor, finance advisor, taxation advisor and business/financial advisor prior to signing any document.
Fred and Jane (and importantly a prospective Franchisee) will benefit significantly from discussing franchise issues with other like Franchisor’s and/or Franchisee’s as the case may be.
Franchising can offer an alternative to setting up a business from scratch though it can be seen that whilst there are possible advantages and disadvantages to such a form of business system, there are many things to consider before Fred and Jane take the leap into Franchising (and indeed a prospective Franchisee acquiring a Franchise).
For further information contact Blackwell Short Lawyers, Department of Fair Trading, ACCC, IP Australia (for intellectual property – registration of trade marks etc), Franchise Council of Australia