Business structure basics: franchising
If you’re looking to purchase a franchise, what you’re doing is buying a business with an established name, marketing and operating procedures.
Prospective franchisees must also recognise that entering into a franchise agreement means you’ll need to follow the franchisor’s system of running and marketing the business.
As Business Victoria points out, there are four main types of franchise:
Product and trade name franchising
This type of franchise grants individuals the right to distribute a manufacturer;s product within a specific territory or at a specific location, generally with the use of the manufacturer's identifying name or trademark in exchange for fees or royalties.
The franchisee sells the franchisor’s product directly. This type of franchise includes car dealerships.
The franchisee manufactures and distributes the franchisor’s product under license. Examples include soft-drink bottling arrangements.
Business format franchising
This category is broken down into two sub-categories:
The franchisee purchases products for retail sale from a franchisor and sells the products tot the public. Examples include hardware and automotive parts stores.
This is what most people think of when they hear the term ‘franchise’. The franchisors markets a service or product under a common name and standardise system through a network of franchisees. An example would be McDonalds or Subway.
According to Marsh & Maher lawyer and franchising law expert Marianne Marchesi It is important that legal and accounting advice is sought from professionals with expertise in franchising before purchasing a franchise.
“Franchising is a niche area requiring specialist knowledge, therefore it is important to obtain appropriate advice,” she says.
“It is also a good idea to become familiar with the (Franchising Code of Conduct) prior to franchising your business or entering a franchise agreement.”