Franchising 101, understanding the basics

What a franchise is

A franchise is a right to use somebody else’s systems, products or services.

The person selling that right is the franchisor. You, as the purchaser, are the franchisee.

Past that basic proposition, franchising takes many forms. There are common structures, but the specifics of any particular franchise are worked out case by case.

Most franchisors have a standard franchise agreement and a package of documents they provide to prospective franchisees. Those documents set out, usually in considerable detail, exactly what you would be buying into. Read them as the deal, because they are.

What you are actually paying for

This varies, but generally your payments buy some combination of:

• Intellectual property rights. Trade marks, copyright, customer records, operating systems and manuals.
• The right to sell. Either a product made by someone else, or a service delivered using methods designed by someone else.
• Lead flow. Customer referrals within your territory, often through a central number or website.
• Support. Technical, operational, marketing or business support, in whatever form the agreement specifies.

Note the last one carefully. Support obligations are frequently described enthusiastically in a sales conversation and narrowly in the agreement. The agreement is what binds.

The process, and the 14 day rule

Buying a franchise resembles buying any other business, with a heavier layer of regulation on top. That regulation is the Franchising Code of Conduct, a mandatory industry code made under the Competition and Consumer Act 2010 (Cth). It exists largely to protect franchisees by forcing information into their hands before they commit.

You must be given, at a minimum:

• an information statement;
• a copy of the Franchising Code;
• a disclosure document;
• a key facts sheet;
• a copy of the franchise agreement; and
• a copy of any relevant lease and lease disclosure documents, where the site is leased.

Together those documents are meant to tell you what you are getting into. You must be given at least 14 days with them before you sign the agreement or make a non-refundable payment. You can take longer, and in most cases you should.

There is also a cooling off period after signing, during which you can terminate. Use the 14 days properly and you should not need it.

Spend that period getting the documents reviewed by a lawyer and the numbers reviewed by an accountant, and write down every question the documents raise. Our pages on franchise agreements and disclosure documents set out what to look for in each.

What the current Code changed

The Franchising Code was remade, and the current version applies to franchise agreements entered into, renewed or extended on or after 1 April 2025.

If you are looking at material written before that date, including older commentary about disclosure obligations and dispute processes, check it against the current Code. If you are a franchisee under an older agreement, work out which version applies to you before relying on any particular right.

The upside

Buying into a franchise reduces some of the risk and complexity of starting from nothing.

Depending on the system, you may be buying a name customers already trust, which is goodwill you would otherwise spend years building. There should be a demonstrated track record of profitability at other sites, and enough support to give you a realistic path to the same.

Those are genuine advantages. They are also the advantages a franchisor will lead with, so treat them as the starting point of your due diligence rather than the conclusion.

The risks

A franchise carries the ordinary risks of buying a business plus several of its own. New franchisees fail regularly.

• Early stage cash flow can be brutal before you have built a customer base.
• Up front and ongoing franchise fees affect both cash flow and profitability, permanently.
• A system that works elsewhere may not work in your area.
• Getting established often takes materially more work than the projections assume.

Traps worth dealing with before you sign

Part of why the Code exists is that franchisees kept entering systems assuming success was built in. It is not. The following are worth resolving before the agreement is signed, not after:

• Franchisor insolvency. If the franchisor goes into liquidation, what happens to the system, the support, the intellectual property and the customers you generated? Find out what the agreement says, because silence is an answer too.
• Personality risk. In newer systems, strong results at existing sites are sometimes attributable to the talent of the founders rather than to a repeatable system. Ask what happens when someone with average ability runs it.
• Compliance burden. As a franchisee you are limited in what you can do with your own business, and there will be reporting, paperwork and payments. Know what they are and cost them.
• Flawed systems or products. If the underlying product or method does not do what it promises, or turns out to be non-compliant, the whole business fails with it.
• Territory. Most franchises limit your geographic area. Understand the boundaries, whether they can be changed unilaterally, and whether another franchisee can be placed nearby.
• The numbers. Do the same due diligence any business buyer should. Get advice, ask questions, and build your own cash flow projections rather than accepting the ones handed to you.

Before you commit

A franchise removes some complexity from starting a business. It does not remove the risk, and it adds a long term contractual relationship with a party who wrote the contract.

Get advice at the outset rather than after something goes wrong, so the decision is made on a clear understanding of both sides of the ledger. Our franchising lawyers page sets out what a review covers.