Tips for Starting a Franchise
Purchasing a franchise is a worthwhile option in starting your own business instead of building something from scratch. It allows you to run under the name of an established brand and enjoy the benefits that go with it. To see if franchising is something that you would want to get into, here are the things you need to know about starting one.
Abiding by the Franchising Code
Being a franchisor, you are legally obliged to follow the Franchising Code of Conduct, a mandatory industry code under the Competition and Consumer Act 2010, which replaced the Trade Practices Act 1974. The Franchising Code details the following:
- Your rights and obligations. For instance, as the franchisee, franchisors must provide you a disclosure document and franchise agreement.
- The details that your franchise agreement must contain. For example, an agreement entered starting 1 July 1998 shouldn't require a franchisee to sign a statement that releases the franchisor from general liability towards the franchisee.
- Information on a cooling-off period, which allows a franchisee to terminate a franchise agreement within seven days after getting into the agreement or paying non-refundable money--whichever comes first.
- A cost-effective procedure for arbitrating disagreements. The Code also requires that franchise agreements contain dispute resolution procedures compliant to the law.
Take note that the Franchising Code of Conduct isn’t designed to replace free business or legal counsel before getting into a franchise agreement.
The Australian Competition and Consumer Commission, or ACCC, is in charge of managing and implementing the Franchising Code of Conduct. It also educates people about their obligations and rights, and informs individuals purchasing a franchise, or renewing and/or extending a franchise agreement.
For more information on the Franchising Code of Conduct, you may peruse its overview at the ACCC website.
Know your tax obligations
Since franchises can run under different business structures (e.g. partnership, corporation, limited liability company), its tax obligations differ, depending on the structure used.
However, there are some general tax facts that apply. These include the following:
- Concessions for small businesses
Small businesses with turnover of less than AU$ 2 million could be entitled to several tax concessions, including:
- Simpler depreciation rules
- Simplified trading stock rules
- Pay-as-you-go instalments based on GDP-adjusted notional tax
- Option to pay the Goods and Services Tax (GST) in instalments
- Australian business number
Franchisees and franchisors must get an ABN to register for various business-related tax registrations, including GST, the fuel tax credits scheme and pay-as-you-go (PAYG) withholding tax.
- PAYG withholding tax
The PAYG withholding system requires you to withhold amounts for certain payments like:
- Dividends and royalties paid to non-residents
- Salaries, allowances, bonuses and/or commissions given to employees
- Compensation given to a company director
Remember: You need to register for PAYG withholding before you start withholding any amount.
If your franchise has employees or contractors similar to employees, then you have to provide a minimum level of superannuation for them. If you run a partnership or proprietorship, you do not have employer obligations to your partner or yourself, but you may provide for your own super. If your company employs you, your firm is responsible for you as its employee.
For more details on your tax obligations, see the ATO’s franchising and tax page.
Getting into a franchise agreement
A franchise agreement is a legally binding contract that details the rights and obligations of franchisees and franchisors. As with any contract, you have to study and get as much information as you can about the franchise. Here are the many considerations you need to think about before signing a franchise agreement:
- Details of the business
Consider the franchisor's reputation and past performance (e.g. success rate of other franchisees). You also have to find out the franchise's strategic plans, especially for the future. Bottom line, you must know all pertinent information about the franchise.
- Things included in the deal
Does the sale include use of the business name, reputation, products, advertising budget and assistance by the franchisor? Can you purchase goods from outside the franchise's network? Don't forget to look into your entitlement to intellectual property.
- Franchisee rights and obligations
Find out about your obligations in occupational health and safety and franchise termination. What are the rules when you sell the franchise? If you have a retail lease, see if the document is under your name or the franchise.
- Fees you have to pay
Look into the franchise's many fees, including the following: initial purchase, advertising, franchise renewal, third-party payments, dispute resolution costs, transfer, training and franchise service.
Settling franchise disagreements
The Code provides details on how to resolve disagreements between franchisors and franchisees. If there is a dispute between the two parties that can’t be settled, the Office of the Franchising Mediation Adviser can assist in resolving the situation without having to go to court. Take note that there’s a fee when a mediator is selected.