So you’re contemplating getting into business and wondering whether to go for a franchise. In this article we discuss the basic terminology and features of a franchise.
Owner of a unique business system.
Person who is licensed to use the Franchisor's system and name in their own separate business for a specified term. Commonly the term is five years with one or two rights of renewal.
This regulates the operation of the Franchisee’s business. The agreement is usually weighted in favour of the Franchisor, and Franchisees will not be able to negotiate changes to it. This is necessary to protect the integrity of the Franchise System, but it must still be fair.
A Franchisee will usually have to pay an initial Franchise fee which is a lump sum to compensate the Franchisor for development costs and as a licence fee.On-going service or royalty payments are for the on-going use of the system and trade name by a Franchisee and for the on-going support and assistance of the Franchisor. It is common for these payments to be in the range of 5-8% of gross sales.
The advertising or marketing levy is normally in the range of 2-4% of gross sales. All franchisees pay the same advertising levy to the franchisor, to be held in a separate trust account and only used for marketing. The franchisor will usually consult with a committee of the franchisees to reach a consensus on how the marketing funds should be spent. But at the end of the day the final decision will rest with the franchisor.
Purchase prices for franchise businesses tend to be higher than for independent businesses carrying out the same trading activity. The theory is that a franchisee pays a higher up-front fee, and on-going costs, in exchange for lower economic risk.
The best franchisors belong to the Franchise Association, and therefore follow its Code of Practice. This reassures potential franchisees that the franchisor is serious and has undertaken to practise in a fair and reasonable manner.
Among other things, the Franchise Association requires its members to:
A franchisor will have rights to terminate a Franchise Agreement. These usually relate to matters such as the insolvency of the franchisee, persistent failure to follow the terms of the Franchise Agreement, bringing the brand into disrepute and so on.
A territorial restriction needs to be clear. A marked-up map should be attached to the Agreement.
We have a team of specialist franchise lawyers, for more information you can contact Claire Byrne on +64 4 916 7483 or email firstname.lastname@example.org
The comments in this article are of a general nature only. You should take advice on your specific circumstances.