The word franchise probably brings to mind many well-known businesses. No doubt, lots of them are in your local area or town. From retailers and hotels to restaurants and petrol stations, the franchise format is alive and well across almost every industry sector in Australia.
So, how does a franchise business work and how does the franchise system fit within Australia’s broader economy?
Let’s find out.
What is franchising?
Franchising is a business model where one company (the franchisor) owns a brand and offers a license to others (franchisees) so they can sell the products or services under that brand for a defined period of time.
The franchise business structure offers would-be business owners the best of both worlds. They get to be their own boss with the support of a proven and well-known brand.
How large is the franchising industry in Australia?
Franchising has revolutionised how the retail industry works by allowing small business owners to compete with resources matching those of the large corporations.
In the 1970s, American fast-food retailers were responsible for the rise of franchising in Australia. Now, franchising is a significant and growing business sector across most industries, particularly retail.
While it began with overseas franchisors, 90% of franchise opportunities in Australia are now home-grown, like us. And franchising has even allowed a number of Australian businesses to take their business overseas.
According to The Franchise Council of Australia, franchising is a growing industry, currently worth $182 billion with over 80,000 franchised businesses operating.
How the franchising industry works
In 2016, the franchising industry was employing around 472,000 people. Food retailers made up 13% of those units. The 2020 forecast is for 508,000 people employed across over 90,500 franchise units.
That makes franchising a huge industry and heightens the importance of all parties acting professionally and in good faith.
Code of Conduct
While investing in any business is a risk, there is legal protection in place for franchisees. Both franchisors and franchisees are bound by a Code of Conduct which sets out how each party must act towards the other.
The Franchising Code includes:
- Disclosure requirements
The Code sets out a list of information and documents that the franchisor must disclose to the franchisee when entering into a new franchise agreement, or renewing or extending an existing one. This gives the franchisee the information they need to make an informed decision about the agreement.
- Good faith obligation
Franchisors and franchisees are both obligated to act in good faith in their dealings with one another. While the common law definition of ‘good faith’ continues to evolve, essentially it means both parties should act honestly and with no ulterior motive.
- Dispute resolution mechanism
If there isn’t an internal complaint-handling procedure set down in the franchise agreement, there is one provided by the Code which must be used for any disputes.
- Cooling-off period
There must be a cooling-off period of seven days for a prospective franchisee entering into a new agreement.
- Procedures for ending a franchise agreement
The Code requires procedures to be set in place for ending a franchise agreement. This can be by transferring the agreement to a third-party, either the franchisor or the franchisee terminating the agreement or the agreement coming to the end of its term.
As well as abiding by the Code of Conduct, franchisors and franchisees may also be legally obligated to meet other pieces of legislation like:
- the Fair Work Act
- the Australian Securities and Investments Act
- Australia’s tax laws
- state and territory licensing schemes.
How franchise businesses work
Let’s now look in more depth at how franchising works.
There are four business models generally used in franchising in Australia.
This model is commonly seen in businesses like new car dealerships. The agreement enables a retailer (franchisee) to sell the franchisor’s product straight to the public.
This type of model is often used by soft drink companies for bottling their products. A franchisee is given a licence to manufacture and distribute the franchisor’s product.
In hardware or automotive parts stores, you’ll often see a wholesaler-retailer agreement. Under this model, a franchisee retailer buys products from a wholesale franchisor and then sells them under licence at retail.
This is the most commonly-known franchise business model, and what is typically meant by franchising. It’s used in sectors from Quick Service Restaurants to hairdressing services. In this type of agreement, also called a ‘business format franchising’ model, the franchisor markets its products or services through a network of franchisees. Each franchisee must use a common name and a standard set of systems and processes.
Under the retailer-retailer model, franchisees are obligated to protect the brand integrity of the franchisor by following the agreement guidelines. These can include constraints on elements like:
- where the franchise can be located
- the image of the business
- the quality of the goods and services
- how the business is operated.
These restrictions ensure the quality of the product or service is maintained. This, in turn, leads to a higher chance of success for the franchisee. They are part of an established brand and have access to the franchisor’s resources such as marketing services, training and ongoing support.
The franchise model used by retailers like us here at Red Rooster gives small business owners the opportunity to operate a successful business. But, of course, it’s critical you do your own research on what to know before buying a franchise.
Franchising in Australia – continuous improvement
Franchising will continue to be one of the fastest-growing sectors in Australia with ongoing improvements in standards and conduct.
Want to own your own piece of a trusted brand by becoming a Red Rooster franchisee?
Get in touch today!
Our Franchising Team is here to help: