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What is a Franchise

Written by: Colin Mackie

Article Overview: A franchise is a simple method of expanding a business system using a legal document to secure the IP. However, there are more aspects to a franchise than just the legal rammifications. People develop franchises and people buy franchises - what it means to them is much more than the legal structure.

What is a Franchise

What is a Franchise?


Describing a franchise is like describing love; it is many things to many people.

The definitions are as wide and as varied as the oceans. If you asked 100 solicitors what does, and does not, constitute a franchise under the law, I would hazard a guess that you might get 100 various responses.

From a legal standpoint, a franchise is the granting of certain systems of business operation to a second party under a range of legal conditions. The legal conditions are essential for the systems to be secured and duplicated. With such a wide and open description, where a ‘license’ ends and a ‘franchise’ begins can often be very unclear.

Many people who have an adversity to the term ‘franchise’ will go to great lengths to circumnavigate their interpretation of what constitutes a ‘franchise’ and build a ‘licence’ instead. Unfortunately, these ‘licences’ often are determined by the court to be a ‘Franchise’ by another name, and very costly prosecutions have been successful under the franchise code.

Certain forms of distribution can also fall under the description of what constitutes a franchise. If the Licensee is restricted in any way from diversifying his product range or the services he can provide, or if he is instructed as to various forms of selling or marketing procedures, pricing structures, uniforms, business names, etc, etc, it may well be classed as a franchise under the law.

This is not all bad news. From a Franchisees point of view, these laws have been constructed to protect them from unscrupulous individuals and unhealthy business practices. Legal documentation is usually written in English rather than the previous ‘Legalese’ that seemed to have been designed to confuse rather than illuminate which is also a great step forward.

One of the most onerous sections of the law pertaining to franchising is Section 52 of the Australian Trade Practices Act which forbids ‘misleading and deceptive conduct’. ‘Misleading’ does not necessarily mean blatant untruths or out-right lies, it can be verbal or written information that was given with the intent to mislead.

Franchisors have been forced to become super honest. If the Franchisor has a decent number of outlets or franchises operating, it is fairly easy for him to make a fairly accurate estimation of what a new outlet or franchise might turn-over in a specific location. You, as an intending Franchisee, may be investing a few hundred thousand dollars and you would like to know what the Franchisor has estimated the new enterprise can, or might, earn. He may be very accurate at predicting this, however he would be very stupid to tell you what he believes. His estimate is based upon a number of factors, not least, the skills, attitude, dedication and commitment of the Franchisee, you.

No matter how stringent his investigations into your perceived qualities may be, he cannot predict the future. He does not know how you will react under certain conditions. Whether your spouse may suffer from depression or homesickness and this, in turn, affects your performance as a Franchisee. He is not privy to the future weather conditions, earthquakes, floods or famine. He is not included in the board of mega-national companies with their own agendas or to the vagaries of local and state governments working to the beat of their own drum.



If things do go bad you will remember that the Franchisor said that you would/could make an easy $200,000 pa. He may well have done so, but with a trailer stating that this was dependant upon your performance/behaviour/dedication. Whether intentionally, or due to the difficult circumstances in which you find yourself, you have forgotten this ‘rider’ to the statement. This is then taken to court where the Judge decides that it constitutes ‘misleading conduct’. Not a very fair outcome for the Franchisor who may have been totally innocent in his intentions.

However, it is important to be aware that these laws also protect the interests of the Franchisee in many respects. Some may see them as very heavily weighted in favour of the Franchisee but this might not necessarily be a bad thing. If a Franchisee is successful in his business it follows that the Franchisor is also successful. No one needs to fear a franchise. Whether you are an intending Franchisee or considering becoming a Franchisor, getting the ‘right’ advice will keep your business expansion plans alive and allow you to follow your dreams.

Some descriptions of a franchise can be of an esoterical nature; “Being in business for yourself and not by yourself” is one of the most common. It is a very good description for this is what the concept of franchising is supposed to be for the Franchisee: A union of parties where one party contributes certain systemised skills with the second party bringing a complimentary range of skills, together this should then be a very strong and powerful trading entity.

Note the word, ‘should’. We all know that ‘should’ does not equal ‘does’. This is the spiritual goal of franchising: A symbiotic pairing of entities where both benefit equally. Sadly, human nature being what it is, this is a goal that is not often reached completely. However, getting close is often an enviable and attractive business position for both parties.

From a less formalised and legal description, the basis of a franchise is that someone has gone before you. They have spent considerable dollars and a huge investment in time in finding out what works and traversing blind and unprofitable business alleys to develop a system that works. Mistakes are costly. Many businesses do not recover from a mistake – many simple mistakes can be fatal. What mistakes are there to encounter in a particular business and how to sail through with the minimum of damage is one of the reasons that there is a franchisee fee.

The franchisee fee is a payment made by the intending Franchisee to the Franchisor as compensation and insurance: A way of compensating him for his tenacity and his endurance for getting his business system viable. And it is an insurance to guarantee that he will not let you make the same mistake.

It can take three years to get an independent business into a positive cash-flow situation. Three years of hard work, heartache and disappointment. With a franchise system you can often be in a positive cash-flow situation within a month. How valuable is this?

Franchising is the safest method of getting into business. I also believe that it is the cheapest. You may pay more up front but it will cost you much more to try to re-invent the wheel. PLUS; united we conquer…. Bulk discounts, cooperative advertising, mentors and compatriots abound in a franchise system. Being in an independent business alone can be a very lonely experience

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Article Tags: adversity, australian trade practices act, bad news, business names, business operation, business practices, franchise, franchisees, great lengths, legal documentation, legal standpoint, legalese, licensee, misleading and deceptive conduct, oceans, prosecutions, section 52, solicitors, trade practices act, unscrupulous individuals



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Re: Enticing Franchises - Top 9 List - All Franchise listed above are in millions of dollars. Do you have the list of Franchise in thousands
Re: Info for would be franchisers... - [quote="Sebastien":1d29sdv1]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to. I just want to mention that all these magazines are NOT franchisee oriented. I mean these magazines are for franchise professionals. If you're looking to buy a franchise, you won't find much information in there. To answer your question, getting published in Franchise Times was fairly easy. I don't want to brag too much but I think I am known in the franchise industry. I was the marketing guy at Franchise.com for a few years before joining my new company, the World Franchising Network. So people know me and I have a very good relationship with Nancy Weingartner, the Managing Editor at Franchise Times. I was talking with her at the last Franchise Expo South in Miami and she mentioned she'd like me to be profiled. I was like "ok, sure!". I like this franchise executive profile thing in Franchise Times as it is rarely BS. People are usually really natural in there.[/quote:1d29sdv1] Thanks for the follow up Sebastien! And I can't say that I'm surprised that networking with the right people and managing your relationships with them properly are the keys to being published. I guess the old adage holds true of "it's not who you know, but who knows you" that's important.
how much for a franchise fee? - Dear Colleague There is no easy answer to this question. Things to consider: [list=] The sizeof the Franchise Clent base Expected Turnover Intellectual Property costs (recoup) Number of Franchises Number of employees Original Set up costs Franchise admin costs An example: A franchise that I was involved in setting was to a simple "lawn mowing/home repair" franchise. The Franchise included national/local advertising - preparation of client lists - general admin - central accounting etc The Franchise involved 300-500 clients - and an annual turnover of about $300,000 . The annual franchise fee was $30,000. Hope that this gives you some idea Take care Ian[/list]
Re: Franchise Surveys - Another good tool to researching a franchise is to speak with their existing franchisees. This contact information is included in most Franchise Disclosure Documents. In order to get a Franchise Disclosure Document or FDD as it is often referred to, you will have to complete a basic franchise application. The franchisor will then usually provide you with the FDD at that time. Included in that book of information is a list of the existing franchisees, the contract, the investment information etc... This information is required by Federal Law to be disclosed to your prior to making a purchase. So be sure to do your research and start with the Franchise Documents to get the initial information.
Re: Info for would be franchisers... - [quote="Sebastien":2gam0klq][quote="BuzzAroundBooks":2gam0klq]Like Franchise Times, Franchise Update is a very practical magazine. There is no blah blah, just straight facts that anyone in the franchise community can relate to.[/quote:2gam0klq][/quote:2gam0klq] That is really what I look for in any industry publication. We lead busy lives and when people fill their magazines with fluff, not only does it benefit no one, but it makes us truly appreciate those that don't. Thanks!


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