The keys to setting up a franchise business

By on 19 April 2016 in Franchising Law with 1 Comment

Once you have decided that franchising is the right option for your business, you need to consider the first steps for setting up a franchise system. It is essential to make sure the basis of any business arrangement is well thought out and structured. It is in everyone’s best interests to speak with a franchising lawyer and your accountant early in the process to determine what steps your business must take to set up a franchise system and to get the legal structures correct at the start.

The following are some general steps that all businesses should take for setting up a franchise system.

Developing a Franchise Model

It is recommended that a franchise model be established, including a suite of legal documents, before going to market to start to find potential franchisees. In developing a franchise model it will be discovered that there are manner ways in which the business can improved and create management processes, all of which can be incorporated into the franchises.

Operations Manual

It is our experience that it is at the start when the Operations Manual needs to be developed or at least started. We would hope that by this time a successful business would have detailed operational systems and flows and processes documented. Often they are documented, but they are spread throughout the business without actually being documented in one document called an Operations Manual.

A comprehensive Operations Manual ensures that all the franchisees will be working together in accordance with the same principles and procedures as originally developed to set up an efficient franchising business. This can be as detailed as how the receptionist answers the telephone when a call is received into the business.

Relationship with Potential Franchisees

It is important that careful consideration be given to future franchisees. It is important for your franchisees to share the same business vision and have all the necessary skills and attributes that may find important or valuable, not simply do they have sufficient money to buy a franchise – something which happens all too often. The Franchisor must have a working relationship with franchisees since building a franchise system is very much a team effort. While the Franchise Agreement and relationship is often seen as adversarial this does not lead to a really successful franchise business. You as the Franchisor will be effectively leading your business, and will require the support and cooperation of your franchisees throughout the entire process.

Preparing a Franchise Agreement and Disclosure Document

The next most important step in setting up the franchising system is to create a Franchise Agreement and Disclosure Document. The Franchise Agreement will set out the rights and obligations between the Franchisor and the Franchisee in relation to the business and is the key legal document. The purpose of the Disclosure Document is to give sufficient information to the Franchisees so they can make an informed decision about whether to enter into your particular Franchise Agreement and business.

These Agreements are lengthy and quite complicated and it is imperative that sufficient legal resources are invested in their drafting to avoid the risks of conflicts or dispute in the future. A franchise lawyer will be able to prepare a comprehensive and detailed Franchise Agreement that will protect your rights and obligations as well as ensure that your Disclosure Document complies with the Code.

Obtaining legal advice will also ensure the protection of one of your most valuable assets, the IP of your franchise, whether in the form of brand name, business concept, trademarks or logos.

Taxation Obligations and Requirements

As a Franchisor, the business earnings will be subject to a range of taxes including Income Tax, GST withholding tax, superannuation surcharge, payroll tax and Capital Gains Tax. It is essential that the Franchisor knows the legal and accounting obligations with what taxes the business will be subject to and the reporting requirements. Since the taxes that apply to the franchise business are largely dependent on the business structure, including grouping issues for payroll tax, legal or financial advice on the various tax obligations should be sought.

We recommend obtaining an experienced franchising lawyer to review your intended set up and Sajen Legal will assist to ensure your business is ready. Contact us should you have any questions regarding franchising your business.

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About the Author

About the Author:

Alpa is a lawyer at Sajen Legal practicing in the Business and Corporate Law team. In the Business and Corporate team, Alpa focuses on corporate structuring, asset protection, corporate governance, smsf compliance and mergers and acquisitions.

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