Franchising your business

The commercial test, before the legal one

Ask four questions honestly. If the answer to any of them is no, franchising is the wrong tool.

1. Is it teachable? Can an intelligent person with no experience in your industry be trained to run a unit to your standard in a matter of weeks. If success depends on you personally, you are not franchising a system, you are selling your own labour to someone else.
2. Does the unit economics support two parties? A franchisee has to earn a proper return for their work and their capital after paying you a royalty. Model it on a real site with real rent and real wages, not on your own best store where you do not pay yourself.
3. Is the brand worth paying for? A franchisee pays for a trade mark, a system and a customer expectation. If nobody outside your suburb has heard of you, the value proposition is the system, which had better be very good.
4. Can you support them? Franchising converts you from an operator into a support business. Field visits, training, marketing, supplier relationships and compliance are the job. Many owners discover they preferred running the shop.

A pilot site run by a manager, not by you, is the cheapest way to test the first two questions before you spend anything on documents.

What you have to build before you sell a franchise

• A registered trade mark. The Code contemplates a trade mark or commercial symbol owned by or licensed to the franchisor. A business name registration is not enough. Apply early, because registration takes months and an objection takes longer.
• An operations manual. This is the system. It is also the document you rely on when a franchisee is not complying, so it should be capable of being updated and incorporated into the agreement by reference.
• The franchise agreement. Term, renewal, territory, fees, supply, marketing fund, capital expenditure, transfer, termination, restraint and the new compensation and return on investment provisions. See what is a franchise agreement.
• The disclosure document. Prepared to the Code's content requirements and updated annually. See the disclosure document.
• The Franchise Disclosure Register profile. New franchisors must be on the register before entering franchise agreements.
• A structure. Most systems separate the entity that owns the intellectual property from the entity that franchises and from any company-owned outlets. See setting up a business.
• Financial models and territory mapping, and a decision on whether territories are exclusive, which is one of the hardest things to change later.

Fees, and what they are actually for

The fee model is a commercial decision, but it should be defensible. Franchisees ask what each fee buys, and a franchisor who cannot answer that has a compliance problem waiting.

An initial fee compensates you for granting the rights, for training and for setting the franchisee up. It should not be priced as profit on the sale, because a system that makes its money selling franchises rather than supporting them is the pattern regulators look for.

An ongoing royalty, usually a percentage of gross revenue, funds the support you provide. Percentage of revenue is simpler to audit than percentage of profit, which is why it is standard.

A marketing levy goes into a fund which, under the Code, must be kept in a separate account, spent on legitimate marketing expenses, accounted for annually and generally audited. Franchisor-owned outlets should contribute on the same basis. The new Code extends similar rules to other specific purpose funds.

Required capital expenditure must be disclosed with the reason, the amount, the timing, the expected benefits and the risks. For agreements from 1 November 2025 you must also give the franchisee a reasonable opportunity to make a return on investment you require, which affects when in a term you can demand a refit.

The alternatives worth considering first

Franchising is not the only way to expand, and it carries the heaviest regulatory load of the options.

Be careful with the licensing option. If the arrangement gives a right to carry on a business under a system substantially determined or controlled by you, associated with your trade mark, in return for a fee, it is a franchise regardless of what the document is called, and running it without a disclosure document is a contravention.