Most people know of the big franchises like McDonalds and Starbucks.  However, there are a lot of franchise opportunities around that aren’t so well-known, for example Lollipop Land, Bedpost, Brumbys, Liquorland and Arano (orange juice) being as franchises.

It is a growth industry and it’s not hard to see why.  Being your own boss is often what motivates people to start their own business, but equally many are dissuaded because of the risks involved.  Buying a franchise can allay a lot of the fears associated with start-up and if you’ve done your homework, it can have extremely lucrative long-term benefits.

Franchising allows companies that have a good product or service to expand quickly by using the capital and commitment of others.  It can be applied to almost any industry.  It also allows those who wish to own their own business to enter the market fully trained and equipped, and usually with the security of proven products and business systems behind them.

What is a Franchise?

A franchise is a contract-based arrangement.  The terms of the underlying contract are therefore crucial to the success of the franchise.  Although governed by the law of contract, it is often more complex than a standard commercial contractual relationship.

Under a standard commercial contract the parties need to co-operate but are usually doing so for separate advantage. Franchising, on the other hand, creates a bond between franchisee and franchisor that is ongoing.  It must provide for significant continuing obligations on each side to make the business a success.  The contract must therefore clearly reflect and document the necessary win/win situation … the ability of the franchisor to make money but also the ability of the franchisee to be profitable.

The parameters of the ongoing relationship between franchisee and franchisor are pivotal to the success of the venture.  It is therefore important to detail the expectations of both parties in a franchise agreement.

Do You Have Bargaining Power?

Often well-established franchises have well-established franchise agreements.  In these situations it is often difficult to negotiate an amendment to key terms and you could get stuck with ones that are less than ideal.

For example, we heard recently of a franchisee whose business began with a hiss and a roar, but six months down the track they found themselves located across the road from a competing business – of the same franchise!

We can’t know now whether the owners could have successfully re-negotiated the clause that allowed this situation to arise when they bought.  However, whether clauses are re-negotiable or not, it is important to remember that you do ultimately retain control of the situation because you can refuse to buy.

If you feel that the terms of the franchise agreement will compromise your future success then look elsewhere for other franchise opportunities that, for example, give you a territorial right to be the sole operator in a particular area.

Getting The Facts

A term that should ring alarm bells is one that attempts to restrict responsibility for the information disclosed by the franchisor and on which a franchisee’s decision to buy is based.  This sort of term allows a franchisor to present misleading information at the same time preventing any subsequent recourse for the franchisee.

Getting the full facts prior to buying is the only way to get a reliable indication of the soundness of a franchise system and the commitment of the franchisor.  Likewise, giving the full facts is vital to the success of the future relationship as no one reacts well to being duped.

Someone who recognised the value of honesty in an ongoing business relationship was the McDonalds franchisor.  He initially struggled to get franchise sales because he was honest about the position of the parent company (which was not in the lucrative position it is now).  He was also realistic (even conservative) with his projections.  While McDonalds is now perhaps the most successful example of franchising, some of those early potential franchisees were put off and instead bought franchises with more impressive but inflated figures.  Many no longer exist.

Often reflected in the franchise price is the situation where a franchisor is starting out and does not have concrete evidence of future potential.  This should not be hidden in a clause preventing or restricting figures and forecasts from being available to the prospective franchisee.

What happens if you are told incorrect information?  The Fair Trading Act applies to the sale of a franchise business so it can be used to challenge misrepresentations.  However, the extent of its application will be limited in light of any acknowledgment and/or disclaimer clauses contained in the franchise agreement.  This is because these types of clauses indicate the purchaser’s awareness, and importantly their acceptance, that the information provided is not guaranteed to be accurate.  Therefore there is an assumed lessened likelihood of actually being misled by any information that is later found to be inaccurate.

Franchise Wisely

While many risks associated with small business have been removed, franchising still has its failures.  A franchise is only less risky if you choose wisely.

The franchise agreement is at the centre of the business for both the franchisor and the franchisee.  Once the agreement is signed, the parameters, good or bad, are set for your business.