Joining a franchise chain is a business model you see everywhere in Australia, and for people who want to start a business but lack experience, franchising can be a very good option. As a newcomer, before you decide to join a franchise, you need to understand the pros and cons clearly. Before signing any documents, we recommend consulting professionals such as accountants and solicitors.

First, understand the benefits of franchising:

• You can leverage established brand recognition;

• Most franchisors provide training, technical system support, and unified marketing and advertising;

• It is easier to obtain financing

What are the drawbacks of franchising:

• Because of the nature of franchising, the franchisee and the franchisor enter into a Franchisee Agreement, and the franchisee is bound by the terms of that agreement (of course the franchisor is also bound by it). The franchise agreement sets out exactly how the franchisee must operate, so there is very limited room for a franchisee to exercise creativity or pursue their own business ideas

• The franchise agreement sets clear restrictions on the region in which the franchisee can operate and which suppliers they may use

• If the franchisor or other franchisees damage the brand image, it will affect the franchisee’s business

• The nature of a franchise also requires regular payments to the franchisor

• At the end of the contract term, the franchisor may choose not to renew with the franchisee, which means the franchisee will be unable to continue operating the franchise

If you are considering joining a franchise, it is extremely important to conduct “due diligence” before signing the contract. Countless new migrants have lost millions of Australian dollars because they did not carry out due diligence. A legitimate, reputable brand should be proud of its brand and welcome thorough investigation by prospective franchisees. If you do your homework carefully, joining a franchise can be an excellent investment pathway.

So what should a franchisee consider when conducting due diligence?

1. The franchisor’s history and reputation

• How long has the franchisor been operating? What are its business ethics like? Does it have a good reputation?

• Verify through reports whether the company has sufficient capital and funding, and understand its expansion plans.

• Take your time reviewing background materials. Have they provided you with a disclosure document? Ask other franchisees about their experience dealing with the company

2. How good are the franchisor’s products or services?

• How does the market and existing and potential customers view this franchise business?

• Would you choose their services or products yourself?

• How does the product perform? Does it sell steadily year-round, or does it have seasonal fluctuations? Can the franchisee withstand a sales downturn? Make sure the product will have strong market prospects for years to come, not just be a passing trend.

• Who supports advertising and marketing — the franchisor or the franchisee?

Here is one example case:

In 2019, Australian local media reported on a Melbourne Chinese franchisee who joined a well-known Australian coffee chain that also sold cakes and desserts. The owner assumed that choosing a franchise meant comprehensive training and ready-made customers, but once the shop officially opened, the owner’s nightmare began. According to local media reports, the owner could only receive frozen food from the supplier, not freshly baked cakes; sometimes cakes arrived damaged in transit, and some even had hair stuck on them. The poor quality drew complaints from many franchisees — who would buy food like that, and once they had, who would ever come back?

3. The franchise agreement

The franchise agreement should comprehensively set out all the rights and obligations involved in the franchise arrangement between the franchisee and the franchisor. It should be thorough and realistic. The franchisee should review the agreement together with a solicitor or accountant.

• If the franchisor agrees, can the franchisee sell the franchise rights? How much will the franchisor take from the sale price?

• Does the agreement prevent the franchisee from setting up, owning, or engaging in a competing business for a specified number of years after terminating or selling the franchise rights?

• Does it clearly list the fees the franchisee must pay to the franchisor? Does that include franchise fees, advertising fees, and renewal fees? What other fees are there?

• What is the required volume and frequency of purchases from the franchisor? Are there certain other suppliers you may or must deal with yourself?

If a client is interested in joining a franchise brand, before signing the contract the franchisor will provide a standard franchise contract for reference, which will include disclosure materials. The disclosure materials contain data about the franchisor’s business operations and other relevant information. The purpose of disclosing this information is to ensure that the franchisee fully understands the specifics of the brand’s business before entering into the franchise agreement.

This process includes:

1. Expression of interest and application to join

2. A solicitor reviewing the franchise agreement and disclosure materials

3. Signing a new lease with the landlord

4. Completing the contract and commencing business

Generally speaking, at this stage a solicitor and an accountant need to work together to conduct due diligence. The accountant is responsible for the financial review, and the solicitor is responsible for the legal review. The solicitor’s scope of work includes reviewing the franchise agreement and disclosure materials, helping the client fully understand the rights and obligations under the contract and the risks involved, helping the client amend the terms, and negotiating with the franchisor on the client’s behalf, to ensure that the client’s interests are maximally protected before the contract is signed.

In conclusion

Joining a franchise chain may look simple, but it conceals many traps that first-time operators cannot see. If you are considering joining a franchise, once you receive the franchise agreement and disclosure documents from the franchisor, read them carefully. This process requires a solicitor’s assistance to review the documents, flag potential risks, help amend the terms, and negotiate with the franchisor on behalf of the franchisee to ensure their interests are maximised.