If you are thinking of establishing a franchise, whereby you grant third-party franchisees the right to use your intellectual property, processes and systems in running their own businesses, then this article is for you. Establishing a franchise needs planning, consideration, and expertise; after all, acting as a franchisor is a long-term and highly involved commitment.
The following sets out our recommended steps to be undertaken before you go to market, to help you prepare to franchise.
- Ensure the business is ready to Franchise – this sounds simple, but launching a franchise before your business is established and has proper processes in place could be disastrous. Is your brand established and respected? Can your processes be replicated by third parties? Does the market demand for your offering extend beyond existing operations? Have people shown interest in franchising? All of these questions should be analysed before franchising and a thorough franchising business plan written up.
- Put in place effective legal structures – using the same entity that runs your existing operations to act as the franchisor carries with it significant risk. We typically recommend you quarantine your valuable intellectual property in its own entity. Having in place separate entities also means you will need to have ‘links’ between them, for example, to enable to flow of intellectual property rights. Establishing an appropriate and effective legal structure will typically require both legal and accounting advice.
- Confirm your IP is protected – you should ensure your trade marks are registered in all relevant categories and jurisdictions. To the extent your brand is reliant on intellectual property created by any third party, you should ensure proper documentation is in place to enable that use by you and any prospective franchisees (and ensure that the right of use is exclusive!). Typically, this is achieved by preparing intellectual property assignments and licensing documentation, which are drafted by a lawyer.
- Undertake financial modelling – there are numerous fees charged by franchisors to their franchisees, but determining the appropriate quantum for those fees requires financial modelling, which considers the expected revenue and expenditure of franchisee operations. Essentially, you want to make sure ‘everyone wins’ and your franchisees are breaking even within a reasonable period, and that the fees charged are commensurate with your competitors. Helpfully, item 14 of the disclosure document requires you to set out all possible expenditures, which will assist with this financial modelling task.
- Undertake Market Analysis – this analysis should extend to where you consider franchisees will effectively trade, but also ensure your franchise offering is on par or better than that offered by your competitors. You need to ensure there is a market, and the franchise offering will be competitive within that, both with respect to securing franchisees, but also enabling the franchisees to secure customers/ clients.
- Draft the Franchise Suite of Documents – this refers to your franchise agreement (the legal contract), the mandatory disclosure document, the key facts sheet, and other ancillary documents. These documents should be thorough, legally compliant and finalised before any offer of franchise is made. An experienced franchise lawyer will know their way around these documents, and be able to guide you as to what is typically included and how the Franchising Code applies to them.
- Prepare your Operations Manual – Franchisees are not just buying into your brand, but also your process and systems. An operations manual is a document that sets out in detail how a franchised business is operated and provides resources to your franchisees. Think of it as the business bible, or akin to a user guide. Nowadays, most franchisors choose to use electronic operations manuals, so they may be updated and searchable, and there are lots of great software programs to facilitate that. You can draft the operations manual yourself, or engage a consultant to assist. To the extent your manual contains legal documents, such as policies and employment law information (which we recommend they do), these sections should be drafted by a lawyer. For more information on what to include, see our article here.
- Develop a Franchisee Recruitment Strategy – a franchise network is nothing without franchisees! Before you go to market, you should develop a plan for not only how you will recruit franchisees, but also who you want as a franchisee. You should ensure you are selective in who you enable to represent your brand; having in place recruitment criteria and undertaking proper due diligence on prospective franchisees before agreeing to grant a franchise is key. Franchise consultants may assist here, but you can also advertise via business brokers, on your website, and through trade fairs (like the franchising expo held annually across Australia).
- Understand your legal obligations as a Franchisor – while it is not the most riveting read, every Franchisor should read the Franchising Code before they commence franchising. It is prescriptive as to, for example, the grant and renewal process, disclosure obligations and what to do in the event of a dispute. In addition, Franchisors should (at the least!) get up to speed with their employment law obligations, how the Australian Consumer Law works, and the basic requirements of the Corporations Act and how they intersect with the Franchising Code.
- Go to market – Once this is all done, congratulations, you are ready to go to market and actively recruit and sign on franchisees!
If you are considering franchising and think you are ready for step 6, we would love to hear from you. Check out some of our fixed fees here. You can contact us here