DEVELOPING A FRANCHISE SYSTEM

Greyson Legal are experienced in helping entrepreneurs and existing Business owners develop a franchise system to expand their Business and the reach of their products and services. We can assist you by providing legal advice, preparing legal documents and/or carrying out research relevant to the franchise system development phase.

Why Franchising ?

Key reasons why Business owners and those with unique concepts choose to adopt franchising as a strategy for business growth, promoting their brand and selling their goods & services includes:

  • franchising allows for expansion without significant capital being invested by the Franchisor. For example, instead of an existing Business owner investing its own capital in say a further fixed business premises, more equipment and stock - a franchisee can be appointed (and using the franchisee's funds):

    • an additional distribution outlet can be set up - thereby expanding the brand and market reach;

    • the franchisee pays for:

      • the premises lease (or land/building) associated with any fixed Franchised outlet

      • fixtures/fittings associated with any fixed Franchised outlet

      • the motor vehicle (if a mobile Franchised Business)

      • plant & equipment

      • inventory of stock

      • signage

      • advertising (locally to its territory).

  • further, franchising allows for more rapid expansion than would be the case with your own capital; 

  • you get paid to appoint a franchisee - a franchisee typically pays you a franchise fee for the right to use your brand, IP, marketing programs and operational systems;

  • a franchisee may also pay you ongoing royalties, being a percentage of the franchisee's sales on an ongoing basis, and to have you teach them the business and to help them get started;

  • other fees are also typically paid to the Franchisor by franchisees, such as:- contributions to a group Marketing Fund, ongoing training fees, etc

Franchising allows you to grow your Business or promote your concept (eg. by establishing a replica of your existing Business at a new location) without:

  • stressing your Business through aggressively raising internally generated capital; or

  • overly using your own equity; or

  • excessively borrowing funds.

But there are a number of factors that a budding franchisor needs to consider before deciding to adopt a franchising based expansion strategy. Some of these include: 

 

Know Yourself

Do you have what it takes to be a Franchisor ? Different individual qualities are needed to be successful , such as:

  • ability to lead

  • able to understand people and how to manage them

  • motivated and committed

  • good communicator

  • aptitude

  • attitude

  • organisational skills

  • appropriate skillset

  • able to teach and coach franchisees

  • qualifications

  • education

  • experience

  • know how

 

Proven Business or Concept

  • Is your Business or concept proven  ?

  • Have you been trading as a Business for a number of years with a sound track record ?

  • Is there an identifiable consumer market for your product, service or concept ?

  • Do you have a strong brand, product, service or concept that prospective franchisees would recognise and want to be associated with ?  

  • Is your product, service or concept unique and likely to have a competitive advantage ?  

  • Can your Business be replicated ?

  • Perhaps your Business has other qualities as a point of difference between it and your competitors, eg:

    • store design

    • marketing program

    • product or service delivery

    • price

    • etc 

  • Do you have well developed internal business operating systems that can be utilised by franchisees, such as:

    • advertising

    • financial controls

    • product and service handling

    • quality controls

    • pricing policies

    • employee management, and

    • customer service;

    • etc ?

 

Planning

If you are thinking of becoming a Franchisor, you need to plan ahead. Some of the key areas to consider include:  

  • Develop a Franchise business plan

  • Creating the Vision & Mission

  • Determining the expected culture for the Franchise network

  • Create a franchise specific marketing strategy

  • Adopt appropriate  strategic planning

  • Develop a sales and revenue forecast

  • Undertake pricing analysis

  • Supply chain analysis

  • Product/service purchasing requirements

  • Franchisee reporting

  • Franchisee auditing

  • Franchisee policies

  • Setting timelines/goals 

  • Assessing IT requirements 

  • What communication systems are needed

  • Determining Franchisee insurance requirements

  • What plant & equipment is needed

  • What are the inventory requirements

  • Franchise Term | Options to renew (period)

  • Rights of First Refusal

  • Franchise territory selection

  • Exclusive or non-exclusive territories

  • Site selection (for fixed premises franchises) 

  • Franchisee recruitment 

  • Franchise Fee

  • Royalties

  • Franchisee Operations Manuals

  • Franchisee training

  • Franchisee support

  • Marketing Fund (group)

  • Franchisee local area marketing obligations

  • Premises leasing (if applicable)

  • Determining, monitoring and enforcing KPIs

  • Franchisee restraint of trade

  • Security | Personal Guarantees

  • Death | Permanent illness of franchisee

  • Dispute Resolution

  • Franchisor | Franchisee default/termination rights

  • Legalities

  • Etc

 

Feasibility and Due Diligence

How feasible is it to develop a franchise system ? Issues to consider and tasks to undertake may include:

  • Do you have the required funds to develop the franchise system ?

  • Risk management

  • Franchise feasibility study

  • SWOT Analysis

  • Competitor market analysis

  • Appropriate due diligence

  • Assessing resources needed

  • Performing a costs analysis

  • Benchmarking

  • Pilot Outlets

  • Relevant research

 

Franchise Pilot Outlet

Establishing a franchise model is typically associated with replicating the business across different locations. McDonalds Restaurants are a prime example: - the look, layout, type of food and pricing of the products in one store are identical to or very similar to that in another store in a different location.

For such replication to be successful, a Franchisor must develop operational processes, products, communications systems, pricing structures, etc which can be repeated over and over.

One method of due diligence to check if the franchise system can be replicated across multiple sites is to launch a pilot franchised outlet before committing to a larger scale roll-out.

A pilot franchise offers the Franchisor the ability to:

  • work through any issues that arise with the operation of the pilot store

  • address any gaps in systems and processes

  • adjust training techniques

  • make alterations to Operations and Procedures Manuals

  • etc.

Rather than the Franchisor operating the pilot store themselves, the pilot store is operated by a franchisee - it is important therefore to ensure the right person is selected. If you appoint a franchisee with the wrong mindset or skillset and the pilot store fails, it may be difficult to determine if the failure arose due to the actions of the franchisee or as a result of franchise model itself.

If you are contemplating establishing a franchise model then you may wish to consider whether a pilot franchise outletshould be set up first to verify if the franchise model is a viable strategy for your Business growth.

 

Legalities

One keep component in developing the franchise system is the legal framework. This may entail:

  • the legal structure of the Franchisor

  • identifying and protecting intellectual property

  • satisfying the requirements under the Franchising Code of Conduct

  • complying with other applicable laws

  • creating the necessary legal documentation for the system (as applicable), such as:

  • Franchise Agreement

  • Disclosure Document

  • Confidentiality Agreement

  • IP Licences

  • Guarantee and Indemnity

  • Deed of Restraint

  • Deed of Prior Representation

  • Leases

  • Occupation Licences

  • Tripartite Deeds 

  • Franchise Application Forms

  • Statements (prescribed under the Code)

  • Deeds of Assignment

  • Supply Agreements

  • Territory selection criteria

  • Employment Agreements

  • Policies and procedures

  • Franchisee Operations Manuals

  • Franchisee Vendor Finance loans, mortgages and financial securities

  • Etc

 

Financials

Is it financially viable to establish a franchise system ? Matters to think about and things to do may include:

  • Undertake a financial analysis

  • Do you have the required capital

  • Are you obtaining finance

  • What are the initial franchise system set up costs

  • How much capital will franchisees need to invest

  • How will you determine the Franchise fees payable by franchisees

  • Do franchisees have to pay Royalties

  • What are the ongoing costs

  • Conduct a Break-even analysis

  • What will be the return on investment (ROI)

 

Franchise Management Systems

As a prospective Franchisor you need to consider and put in place appropriate franchise managements systems. That is, ways to help manage individual franchises and the franchise system. This may entail methods to:

  • capture franchisee information

  • gather and collate relevant data

  • assess financial figures, such as - measuring budgets versus actual performance

  • generate applicable reports

  • track franchisee communications 

  • capture customer information

  • manage and coordinate franchisee training

  • manage your franchisee territories - such as, allocation of jobs from head office based on territory ownership

  • ensure key dates are not missed, for example, Term renewal date notifications required under the Franchising Code of Conduct

  • automating billing processes

  • calculate royalties based on revenue

  • etc

With an effective franchise management system in place Franchisors are better able to:

  • assess the overall state of the franchise business model

  • track franchisee performance and compliance

  • achieve pre-set goals

  • set and review key performance indicators (KPIs), for example, the Franchisee maybe required to reach certain minimum sales targets

  • calculate the marketing levy in the form of a percentage (%) of gross net sales turnover during a specified period

  • calculate royalty payments based on a percentage (%) of gross net sales turnover during a specified period

  • carry out sales forecasting and determining the amount of revenue that will be generated during different periods. This information can be used to formulate specific marketing strategies for different times of the year.

When putting in place any franchise management system it will be necessary to also include:

  • an assessment of your current information technology (IT)

  • determining whether those IT systems need to be updated or replaced

  • an analysis of other franchising IT systems (such as cloud based franchise systems) to see whether they fit with your franchise model.

 

Managing Prospective Franchisee Expectations

For prospective Franchisees, their decision to invest money, time and effort in joining a franchise system will be a difficult decision for them. The perception in the mind of the Franchisee in regards to the Franchisor itself, the franchise brand and even franchising as an industry will play a role in the Franchisee's decision making process. 

Building trust with prospective Franchisees and portraying a positive perception in the mind of the prospect starts from the very first interaction you have with them. That being the case, it makes sense to:

  • be transparent in your dealings with them;

  • provide sufficient information to prospective Franchisees that will assist with their due diligence;

  • encourage prospects to contact your other existing Franchisees for feedback;

  • recommend to prospects that they seek independent legal and financial advice before committing;

  • perhaps suggest the prospects undertake pre-commencement courses;

  • give prospects sufficient time to review and consider your Franchise Agreement, Disclosure Document, Operations Manuals and other relevant documentation. 

Franchisee Recruitment

Develop a well thought out and structured vetting process that makes sure prospective franchisees are the right "fit" for the franchise model and understand exactly what they're getting into

 

Pricing of Goods and Services sold by Franchisees

As part of setting up a franchise system, thought needs to be given to whether and how you (as Franchisor) will control the pricing in respect of what your Franchisees can charge for goods and services sold through the Franchised Business.

Issues of control around pricing need to also take into account any statutory restrictions, such as those under the Competition and Consumer Act 2010 (Cth).

 

Managing the Franchise Network

Once the franchise system is established, Greyson Legal assists its Franchisor clients with on-going management of the franchise network through:

  • actively keeping you informed so you are aware of changes to the law which may impact on you, the Franchisees or the franchise system;

  • assisting with Franchise dispute resolution;

  • overseeing any Franchised business re-sales including:

    • preparing all necessary franchise and other documentation required for the transfer, such as:

      • any Deeds of Assignment;

      • new Franchise Agreements (if required);

      • Code compliant Disclosure Documents;

      • etc

Where an existing Franchisee is seeking to sell their Franchised Business, we:

  • provide you with guidance regarding the Franchised Business conveyance process;

  • advise you about your rights and obligations in relation to giving consent to the assignment of the existing Franchise Agreement and sale of the Franchised Business;

  • review and advise you about the terms and conditions to any Contract of Business Sale between an outgoing Franchisee (Seller) and incoming Franchisee (Buyer);

  • ensuring the business conveyance process (from the Franchisor's perspective) proceeds correctly so that you are protected;

  • etc

As commercial lawyers, Greyson Legal can assist you with general commercial law matters relevant to you as a Franchisor and the franchise system as they arise.

Sale of an existing Franchise Network

In the event the franchise system itself is to be sold, Greyson Legal's Franchise lawyers can advise and assist with the sale process.

Considering Franchising or Looking to Expand Your  Business ?

  • Are you an existing business owner thinking about ways to build and expand your business ?
  • Is the business trading successfully ? 
  • Is your business concept distinctive and proven ?
  • Can your business concept be replicated ?

If you answer "yes" to these initial questions, then franchising may well be a business growth strategy you can adopt. 

Go HERE for more information about how to franchise your business or concept.

IF THIS SOUNDS LIKE YOU, NO BETTER TIME THAN THE PRESENT TO GET THE BALL ROLLING.