Accountant Partnership Plus – Starting a Franchise – What you need in place?
In Show 064 – Accountant Partnership Plus – Starting a Franchise – What you need in place? originally broadcast on Facebook Live on Thursday 22 February 2018 we explore this interesting topic.
Today, as part of the Accountant Partnership Plus Program we’re going to continue our conversation about franchises. In Phase 7 of the BLL we detail how franchising works and we’re going to share some of that information with you in this edition of the show.
A franchise has a very broad definition under Australian law. Basically, a franchise means selling your system and branding to another person. A franchise agreement will cover all the details about what you are providing to the franchiser. The franchiser owns the brand and the system but the franchisee gains the right to use those things. In Australia there is something called the Franchise Code of Conduct. This legislation regulates things like what needs to be disclosed and the expectations of the ongoing relationship. The whole point of the code is to ensure that everyone acts in good faith.
There is a temptation among some business owners to simply license their intellectual property rather than pay the sometime hefty franchise fees required by law. We strongly counsel against doing this. If you want to exert any control over how your IP is used you have to franchise. If you simply use a license and then make demands on the licensee you could run afoul of the law.
Choosing the right franchisee is a critical decision.
You don’t want to allow someone access to you business model who is going to foul up your brand. You have to make sure the person you are entering into an agreement with has a good reputation and a solid track record in business. We had a client recently who set up a franchise system in the coffee business. He brought in anyone that wanted to buy the franchise license. The problem was that he wasn’t training and selecting the right people. He eventually amassed something like 50 franchises. Unfortunately he was having massive problems with a number of the franchisees. We had to go through a long process of revamping his franchise process. Once that was done he stopped having all those problems.
The franchiser also has to give a disclosure statement before the signing of the agreement. It’s very tempting to fill out the disclosure agreement yourself. That’s very dangerous. Mistakes can lead to legal headaches in the future. If you haven’t provided the right information you could end up in years of litigation. Among the things you are required to disclose include revealing all current and previous franchisees that have been in business with you. You also have to be clear about all payments that will be required of the franchisee. There are standard fees that are outlined in the Franchise Code of Conduct.
Among the things you are required to disclose include revealing all current and previous franchisees that have been in business with you. You also have to be clear about all payments that will be required of the franchisee. There are standard fees that are outlined in the Franchise Code of Conduct. Another common element of a franchise agreement is the marketing fund. All franchise members can pay into the fund in order to purchase advertising and other marketing services. You also need to be clear about what is going to happen at the end of the franchise agreement. The final thing you need to disclose is all your financial information. You have to provide access to your books so that that the franchisee knows how much the business is making.
Before you sell the franchise you first need to detail how your company works.
That’s going to require a manual. We recommend that the person who runs the company should write the manual. It should include a brief description of what the manual is and who it is for. That’s important because you want to have it ready for any prospective employee to pick up and take with them. Next up is a history of your business, a list of services you provide and the contact information for everyone involved in the business. This section should include everything that you need to do before opening the business. If you are already operating your business you might not think this is necessary but it will be if you ever expand or sell the business. In addition to the names of all your employees you should also write down their roles and responsibilities.
Employment agreements, job applications and recruitment methods should also be written down in this section. You might well have a marketing strategy laid out for your business and it’s a good idea to have that written down. Local marketing, public relations and obtaining marketing approval should all be included here. You will find that there will be plenty of information that you will discover about your business while going through this process. It will also be a good refresher for your employees about what is expected of them. For more detail about how to write a manual we have more information on our website.
The franchise model was developed in the United States and other Western countries to allow entrepreneurs to expand a business by essentially leasing the intellectual property to another operator. The IP and branding remains under the control of the original businessperson while the new business is operated by the franchisee. The Franchising Code of Conduct details how the relationship between the franchiser and franchisee should operate. If you fail to live up to those standards there could penalties. Royalty fees will be paid to the franchiser each month and there are other fees during the start-up phase.
Licensing, meanwhile, allows another businessperson access to your IP and branding. The difference is that the original owner maintain very little control over the new business. If you are going to license your IP to a new business but demand a lot of control over that new business you are actually a franchisee. You can be liable for any disputes in the future. It can be tempting to get around the franchise fees by using a license but that is risky. You can end up paying a lot more in penalties.
More about this Show
We started Business Legal Lifecycle to create a simple way for you to understand complex legal terms. Most importantly we want to help you to develop a plan to take your business successfully into the future. There’s a startling statistic the underscores the importance of developing a solid plan. The majority of business owners are just seven months away from losing everything. A single aspect of your business that is not set-up correctly can shut down your whole operation very quickly. Legal advice is not cheap and even when you can afford it there is often a divide between lawyers and their clients. We want to close that gap once and for all. We want to put legal knowledge and tools into your hand to prevent the worst from happening to you.
Twice a week we are going to deliver those tools right to your home or office with Business Legal Lifecycle TV. We’ll start the week with Fast Fix Monday, a short 5-10 minute video that will tackle a single issue that businesses have to deal with. Then on Wednesday’s our main show will feature with more fulsome discussions and interviews all delivered in a straightforward and easy to understand format.