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Business and Corporate Law, Franchising

To franchise or not to franchise?

PBL’s five key tips and traps for the franchisor

Once upon a time there was a franchisor who decided to open up a range of franchises in several industries including cleaning, appliance rentals, business systems, and other goods and services. The franchisor thought these franchises were a good idea, but did not check to see whether they would work for the franchisees who would be enticed to join up with promises that the franchise could not fulfil. The franchisor had become over-committed and over-stretched, like the dying Roman Empire, did not protect valuable IP, and made many franchisees very angry because of various failures. Eventually the whole business group went ‘belly up’.

So what went wrong here and what should you do if you want to become a franchisor?

Here are PBL’s five key matters you should consider.

1. Look before you leap – do your research and due diligence

Before you even consider going ahead, make sure that the franchise you want to create is going to be an attractive proposition for consumers, potential franchisees and, most importantly, for you.
Look to engage a franchise consultant who can undertake relevant inquiries and discuss with you which business model has the best chance of success. Consult with your legal and financial advisers up-front about the possibility and try and integrate all of your experts into a team for best outcomes.

2. You cannot be afraid of the big bad wolf – compliance and regulation

Franchising is heavily regulated by a mandatory Franchising Code of Conduct and the provisions of the Australian consumer law. Seek early advice from PBL about compliance and regulation. Provided you follow the legal requirements of the Code and some golden rules of consumer law, you should be in compliance and avoid the big bad wolf, the ACCC.

3. Go out on a search and destroy mission

It pays to first set up your basic franchise business model and run it as one or more company businesses in strategic locations, to see if it will work and to determine the level of demand for the product or service you are going to offer. This can also allow the early ironing-out of any problems or difficulties that arise.

4. Protect and grow your honey pot

You are trying to create value in your new franchise system for your future, but you also need to protect it as you do so.

Make sure that your business structure does exactly that. Have one entity – preferably a company with the shareholder being a family trust – operate the business and another entity hold all the valuable assets such as IP, plant, and equipment, and even perhaps have another – such as an SMSF – hold your business real estate with relevant licences and leases in place.

This way, if it all goes pear-shaped you can easily cut off the valuable assets from the drowning business.

5. The devil is in the detail – systems and documents

You have to have really good, compliant, and flexible systems and documents in place to make it work.

The last thing you want is for a disgruntled customer or franchisee to take legal action and succeed because the business systems or documents were not fully functional and workable, like the case I described in the introduction.

So, once upon a time there was a franchisor that followed the advice they were given…

If you have franchising plans, please contact me on xxxx.

DP

 

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