Business Law

Beware the hidden dangers of franchising

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When starting a new business, a franchise can be an attractive prospect. Entrepreneurs often find the promise of a well-established brand, bankable goodwill and the guiding hand of the franchisor too good to resist, a seemingly safe alternative to starting your own venture from scratch. Success stories, neatly captured on the franchisor’s website, might well convince you that a franchise is basically a licence to print money. Experience, however, tells us that such benefits often come with strings attached and many new franchisees are unpleasantly surprised by the hidden costs and controls inherent to a franchise.

When investigating a franchise, you’ll be given an extensive disclosure document detailing information relevant to the business, its operation, costs and your obligations. These costs and obligations can include franchise entry, licence and support fees, royalties and obligations to maintain the brand and apply your “best efforts” to the business. Such conditions are often considered “standard” but they are by no means the limit. For example, the franchisor may carry out their own national advertising, but you’ll be obliged to contribute to their marketing costs (often in addition to your own local advertising expenses). If the franchisor revamps the brand or its standard equipment, you may have to rebadge your business and upgrade your machines, all from your own pocket.

You also need to consider that you are not necessarily your own boss. You may run the business but the franchisor owns the brand and usually has step-in-rights to take control of the business should you breach the franchise agreement. Consider what degree of control you want, or are prepared to concede, over your business. Franchisors can impose strict limits on your independence, including your ability to introduce new business partners, choosing stock and suppliers, the types of goods or services you deliver, the territory you can trade in and a whole host of other operational requirements.

Franchisees often fail to look ahead to the end of the franchise relationship, particularly where they want to leave early. Payment of a “transfer” or “termination” fee is a common prerequisite to release. If your franchisor holds the lease for your premises, they may pass on the costs of early termination.

Franchises can be a fantastic business opportunity, complete with the marketing support and buying power of a larger group, but don’t mistake it for the easy option. Do your research and read the franchise agreement carefully to make sure you understand the hidden costs and controls that come with running a franchise. Get on top of these issues before you sign and you’ll be in a much better position to turn your franchise into another success story.

Mark Love, Legal Director, Business Law
9th Floor, Canberra House,
40 Marcus Clarke Street, Canberra ACT 2601
E: [email protected]
T: 02 6274 0810

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