What is franchising?

In its simplest form, franchising is a business method based on the use of another person's business philosophy. It is used by a range of businesses as a means by which to distribute their products and services through independently owned retail outlets. It is a popular method of growing or expanding a business for many small business operators and is one of Australia's fastest growing business sectors.

If you buy into a franchise you are called a “franchisee”. The business that sells you the franchise rights is called the “franchisor”.

For a fee, the franchisor grants the right to operate a replicated business under a trademarked name, using established management techniques, marketing and operational procedures.

In addition to this upfront capital fee, the franchisee is also normally required to pay ongoing royalty fees and/or a percentage of gross monthly sales and agree to comply with franchising procedures.

The Australian Competition and Consumer Commission (ACCC) is the federal governing body for franchises in Australia.

What types of franchise models are there?

There are three major types of franchise models:

• Business format franchise – this is the model that people most commonly think of as a franchise. As the franchisee you would be given the rights to use the franchisor's intellectual property in your own business. An example of this model is a fast food outlet.
• Product franchise – this is where the franchisee sells the franchisor's product from a wholesale or retail outlet. As the franchisee you would be given exclusive rights to sell the product within a specific area. An example of this model is a motor vehicle dealership.
• Processing or manufacturing franchise – in this model the franchisee produces the product. The franchisor provides an essential ingredient or "know-how" to the franchisee. An example of this model is the soft-drink industry.

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Advantages and disadvantages of buying a franchise

Before deciding to buy a franchise there are advantages and disadvantages to consider. Advantages could include assistance with marketing and involvement with an established brand. Disadvantages could be the loss of decision making autonomy and strict operational procedures. Read more...

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What will it cost to buy a franchise?

The cost of buying a franchise will vary dramatically depending on which one you select. However, most franchisees will pay an initial up-front franchise fee and a continuing royalty which is a flat monthly or weekly fee, or a fee based on turnover.

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How do I evaluate a franchise opportunity?

There are many things to consider when evaluating a franchise opportunity, not the least of which is how the business fits with your personal characteristics and situation. Many of the issues are the same as evaluating any business idea  however, a franchise does have other factors to consider, such as the implications of the franchise agreement. Read more...

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Franchises and retail leases

Most franchisees also lease a commercial property. Before you sign a lease make sure that you know your rights and obligations under the agreement. Go to Leasing commercial premises for more information.

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What is the Franchising Code of Conduct?

The Franchising Code of Conduct (the Code) forms part of the Competition and Consumer Act 2010. The Australian Competition and Consumer Commission (ACCC) is responsible for ensuring compliance with the Code.

The Code regulates the conduct of participants in franchising towards each other and provides protection for franchisees in the following areas:

• disclosure documents;
• cooling off periods;
• marketing fund audits; and
• dispute resolution.

For more information about how the Code will affect you download the ACCC's Franchisee Start-up Checklist.

Note: On 4 June 2010, the Federal Government Minister announced that amendments to the code will come into effect on 1 July 2010. Refer to the Australian Competition and Consumer Commission website for more information.

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What are the tax implications of buying a franchise?

The initial franchise fee you pay when buying a franchise, along with any renewal or transfer fee, form part of the capital cost base of the business and cannot be claimed as a tax deduction. Given they form part of the cost of acquiring the franchise, they may be relevant in calculating any capital gains tax liability if you sell the business

The ongoing fees payable to the franchisor such as administration fees, royalties, marketing levies and training fees, are generally tax deductible as are other operating costs of running the franchise business.

The Australian Tax Office ( ATO ) has more information about franchising and taxation.

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Applying for finance to buy a franchise

Before buying a franchise, as with starting any business, you'll need to think about how you will secure the funds to buy the franchise. Go to Obtaining Finance.

Very few franchisors provide funding to prospective franchisees.

Each of the major banks also has online information about franchising and applying for finance.

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What's next...

• Read the ACCC's Franchisee Start-up Checklist

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