Module Two will provide you with a basic understanding of:
- Understanding Franchise Disclosure
- The Franchise Agreement: Common provisions of franchise agreements and their implications for franchisees; and consequences of breaching a franchise agreement.
- Franchise Fees & Royalties: Types of upfront fees; and types of royalties and how they are paid.
- Finance: Financing, cash flow and ongoing franchise costs; other costs under a franchise; understanding bank accreditation of franchise systems; and the difference between profit and cash flow.
The Disclosure Document is an extremely important document and should be read thoroughly. It must be accompanied by the Franchise Agreement and a copy of the Franchising Code of Conduct.
Asia-Pacific Centre for Franchising Excellence Adjunct Lecturer Jason Gehrke provides an overview of Franchise Disclosure below.
The type of information contained in the Disclosure Document includes:
- Background information about the franchisor that could provide insight into their experience and competency.
- A list of current and former franchisees
- The cost of the franchise and any other payments required
- Details of intellectual property held by the franchisor (eg Trademarks)
- Information on the franchise territory
- Financial information about the franchisor
- It may not include earnings information
Next, Adjunct Lecturer Jason Gehrke discusses important elements of the Franchise Agreement.
Franchise Agreement Key Understandings:
- A Franchise Agreement is a legal document that joins the franchisee and franchisor in a business relationship
- It may be a long document, however you should read it yourself, as well as seeking advice from an experienced franchise lawyer
- Please note a franchise is a ‘conditional grant’, usually limited by time. (In Australia, franchises are often granted for a period of 5 years, with the option to extend for another 5 years).
- It is very important you understand that if you sign a Franchise Agreement, you are undertaking a range of commitments that you must abide by for the life of the franchise and often beyond. For this reason, you need to take the time to understand it.
It’s critical you understand the franchise agreement and seek clarification from the franchisor, and independent legal and business advisors on any parts you are unsure about. Remember – it’s a legally binding document.
Now we look at franchise fees and royalties. In addition to the initial franchise fee you may also be required to pay on-going royalties. Depending on the franchise royalties may be paid as a percentage of profit, or at a set monthly fee.
Key elements of franchise fees and royalites, what to expect and what they cover are explained by Jason in the video below.
There are three main types of franchise fees:
- The upfront payment you make to secure your franchise. This may also include a training fee.
- The royalties you pay for ongoing support from the franchisor.
- The marketing fee for ongoing marketing activities, which is usually paid into a central marketing fund.
Finance is a core element of any new business venture. In the video below franchise finance expert Rod Nutall discusses requirements banks consider when deciding whether to provide finance.
Some of these elements include:
- Whether the person has fully researched the business they want to go into and whether they’ve developed a business plan with cash flow forecasts.
- Whether the business loan can be repaid during the term of the franchise agreement. (In Australia the average franchise agreement term is five years).
- Banks generally look for some sort of ‘landed security’ – that is a house, shares, or something the bank can tag and use as a second way out should the cash flow of the business or sale of the business be unable to repay the debt.
- A minimum deposit is usually 30-50%, and the remainder of that may be able to be lent against the value of the business, depending whether there’s accreditation of that franchise system.
Rod also emphasises:
- Lack of cash flow is one of the fundamental issues for failure of franchisees in Australia.
- It’s very important to understand the difference between cash flow and profit.
Complete a short-eight question quiz to test your understanding of Module Two. You will be issued with Certificate of Completion if you achieve a score of 85% or higher.