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Module One will provide you with a basic understanding of:
- What is Franchising?
- Advantages and Disadvantages of Franchising
- The Franchising Code of Conduct
- The Role of the Australian Competition and Consumer Commission (ACCC)
What is Franchising?
Module One: Overview of Franchising begins with a video interview of Asia-Pacific Centre for Franchising Excellence Director, Professor Lorelle Frazer discussing the size of the Australian franchise sector, what can be franchised and provides a basic understanding of ‘what is franchising’.
Fast franchising facts:
- The franchise sector has been growing steadily over the past two decades
- There are 1,160 franchise systems in Australia, and more than 79,000 franchise stores or units in Australia
- Franchising contributes around $144 billion to the Australian economy
- Per capita Australia has more franchise systems than anywhere in the world
- Virtually anything can be franchised
- Typical investment range for a retail franchise is upwards of $250,000 and for a service franchise is $50,000 – $60,000
- Buying a franchise is not a guarantee of success
Download the transcript of the ‘What is Franchising’ video (PDF – 53KB).
Advantages and Disadvantages of Franchising
Businesses expand by franchising as way of accessing external capital to fund the growth of new stores or outlets that are operated by committed and profit-driven franchisees that are likely to be more diligent and focused than employed staff.
Franchisees are attracted to franchising for the prospect to become their own boss without re-inventing the wheel. The old adage “in business for yourself, but not by yourself” accurately describes this motivation.
There are a number of advantages and disadvantages to becoming a franchisee, outlined in depth in this document (PDF – 48KB), so please read to familiarise yourself with the pros and cons of franchising.
Advantages of Franchising:
- Known set-up costs
- Cash flow lending available from some banks
- Access to existing brand and operating systems
- Franchisor brand and support can reduce chances of business failure
- Customer awareness of brand, its products and services
- Centrally organised marketing and brand promotions
- Training in the operation of the business provided
- Franchisor may select site or territory
- Ongoing advice, guidance and support from franchisor
- Advice & support from fellow franchisees
- Franchisor establishes supply chain for network
Disadvantages of Franchising:
- Potentially higher set-up costs compared to independent small business
- Not all systems are accredited for cash flow lending
- A franchise is for a limited time only
- Lack of independence to be completely innovative
- Risk of franchisee business failure is not eliminated
- Franchisees pay a levy for marketing in addition to franchise fees
- Requirement for further marketing expenditure in local area
- Training may not meet expectations, or be primarily technical in nature
- The requirement to pay franchise fees to the franchisor
- Franchisee may lack freedom of choice in suppliers
(Please Note: This is not an exhaustive list of the advantages and disadvantages of franchising, but highlights some of the key ones you need to consider). You may discover additional pros and cons through this education program and your own due diligence.
The Franchising Code of Conduct
If you are considering buying a franchise, it’s important to have an understanding of the regulation which govern the sector. This regulation is known as the Franchising Code of Conduct, and it aims “to regulate the conduct of participants in franchising towards other participants in franchising.”
In the video below, Asia-Pacific Centre for Franchising Excellence Director, Professor Lorelle Frazer discusses important information outlined in the Franchising Code of Conduct.
- It is vital you are familiar with the Franchising Code of Conduct
- The Franchising Code of Conduct is mandatory and applies to all businesses which offer franchise agreements
- The Code is enforced by a national government agency known as the Australian Competition & Consumer Commission (or ACCC)
- There are three key elements to the Franchising Code of Conduct: Disclosure; the Franchise Agreement; and Dispute Resolution
- The Code includes a 7-day cooling-off period after the signing of the franchise agreement, and if a franchisee changes their mind within the 7-day period, they are entitled to a full refund of their investment, less any reasonable expenses incurred by the franchisor
- The Code is available online and can be downloaded for free
Download the transcript of the ‘Franchising Code of Conduct’ video (PDF – 54KB).
The Role of the Australian Competition and Consumer Commission (ACCC)
The ACCC is an independent statutory body that is responsible for promoting compliance with—and enforcing—the Franchising Code and the Competition and Consumer Act. Learn more about the role of the sector regulator from ACCC Deputy Chair Dr Michael Schaper in the video interview below.
Some important points about the ACCC include:
- The ACCC’s role is to protect and strengthen the way competition works in Australian markets.
- The ACCC investigates alleged breaches of Act and the Code and can take enforcement action where appropriate.
- Franchise-related complaints received by the ACCC often fall into four broad areas: misleading representations (e.g. about support or earnings); unconscionable conduct; failure to comply with disclosure obligations; and unlawful termination of a franchise agreement.
- The ACCC cannot take action against a party for breaching a franchise agreement because this is a private contractual issue between the parties to the contract. The ACCC will often encourage franchisees to try and solve disputes directly with their franchisors in the first instance.
- Where a dispute arises, the ACCC encourages parties to consider mediation. It’s included in the Franchising Code of Conduct, and often provides a more cost-effective and simple mechanism than taking a matter to court.
- The ACCC can’t provide you with advice about whether an individual franchise system is a good one to invest in. That is a decision that only you can make, and you should seek advice and information from a lawyer, accountant and a business adviser experienced in franchising-related issues.
Due diligence steps recommended by the ACCC for potential franchisees:
- First of all, read the information on the ACCC’s website and read the Franchisee Manual
- Take note of any discussions you have with your franchisor. Ask them to confirm any representations or claims that they make to you in writing.
- Discuss with the franchisor what your rights are in relation to important issues, such as leases, intellectual property, restraints of trade and what will happen at the end of your agreement.
- Find out what happens if the franchisor becomes insolvent.
- Talk to as many past and present franchisees as you can. Ask them about their own experiences with the franchise system and whether they would recommend you enter into it as well.
- Develop a risk management plan and also a contingency plan in case things don’t work out.
- Read the disclosure document and the franchise agreement. Make sure you thoroughly understand these documents and if something doesn’t make sense to you ask your own advisor what it is and what its implications are for you.
Warning signs a prospective franchisee should also keep an eye out for:
- Claims that seem to be too good to be true. For example, get rich quick schemes or claims that will offer you vast riches in a surprisingly short amount of time.
- Be aware of a franchisor that is reluctant to provide critical information, such as details of other franchisees, or is unwilling to back-up its claims or promises in writing.
- Make sure that you have all the information you need to make an informed decision. Be wary if any of the information provided seems inconsistent or contrary to what you’ve been told.
- Keep an eye out for franchise systems that seem to have a cyberspace or post office address as the only way of reaching them.
Download the transcript of the interview with Dr Michael Schaper (PDF – 65KB).
Pre-Entry Franchise Education: Module One Resources
- The Franchising Code of Conduct
- ACCC Franchising website
- Franchising Australia research
- Competition and Consumer Act 2010
- Office of the Franchising Mediation Adviser (OFMA)
Self Assessment Quiz: Overview of Franchising
Complete this short, eight-question quiz to test your understanding of Module One.
If you successfully complete the quiz with a score of 85% or higher, you will be issued with a Certificate of Completion for this module.
> Module Two: Understanding franchise disclosure, agreements & finance