What is a Franchise?

Could it be the right option for you?

A franchise business is a separate business that operates under another business owners business trademark and style of business. In a franchise, the owner of the business trademark and style of business (the franchisor) will sell its rights to another entity to operate a business using those items (the franchisee). In Australia, a franchise structure is one of the most recognisable business structures and is often used by business owners to assist in the expansion of their brand and business.

What happens when you want to invest in a franchise?

Usually to invest in a franchise, the franchisee must first pay an initial fee for the rights to the business, training in the business model, and the equipment required by that particular franchise to the franchisor. After the business is set up the franchisee will generally pay the franchisor a royalty payment (such as a percentage of gross sales) for the continued use of the business model. These payments are generally on a monthly or quarterly basis. After the franchise agreement has been signed, the franchisee will open a franchise business that replicates the business model of the franchisor. Generally, a franchisee will not have as much control over the business as they would over their own business model, however often it is a benefit for a person to invest in a franchise to learn how to operate a business. Usually, the franchisor will assist the franchisee where necessary, this will ensure that the reputation of the business trademark and model is maintained.

Control of the Franchise

Generally, the franchisor will require that the business model under which the franchised business operates stays the same throughout all of the franchised businesses. For example, often the franchisor will require the franchisee to use the uniforms, business methods, and signs or logos particular to the business itself, these will help identify the business and keep it consistent to all third parties. The franchisee should remember that they are not just buying the right to sell the franchisers product, but they are buying the right to use the successful and tested business process. Often the franchisee will pay an advertisement fee to the franchisor so that consistent advertising can be achieved to a larger audience. 

While there are many benefits to investing in an already-successful franchise business model, there are drawbacks as well. As with any investment you make, you should do your research thoroughly before you make any franchise purchasing decisions. Often the franchisor will require a number of restrictions on your use of the business and as such you should ensure that any franchise agreement is fully reviewed by a competent lawyer who can advise you in relation to your rights and obligations under the franchise agreement.

We have extensive experience in assisting franchisors in setting up franchise structures and advising prospective franchisees on their rights and obligations under a franchise agreement.

At SMS Law, our team of solicitors have extensive legal experience. We know the legal system can feel overwhelming, and it is hard to feel confident when you don’t know how to move forward. That’s where we step in, to guide you through each step of the legal process.

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