Franchising is a business model that allows one business to operate under the established brand of another business and to sell its products and/or services for a specified time period.

Franchising can be an excellent way to operate a business and is an alternative to setting up your own business. However, it is important to carefully consider all your options before buying a franchise and to seek advice from an experienced business adviser, accountant or lawyer.

Franchising in Australia is regulated by the Franchising Code of Conduct.

Before choosing a franchise you should:

• learn about franchising and what is involved
• understand the Franchising Code of Conduct (the Code)
• understand your rights and responsibilities under the Code.

View the Australian Competition & Consumer Commission videos which are also available in Hindi, Chinese simplified and Chinese traditional.

Types of franchises

• Basic: This is the type of franchise most people know. As the franchisee you have the right to use the franchisor’s intellectual property in your business. An example is a fast food outlet.
• Product: 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 is a motor vehicle dealership.
• Processing or manufacturing: In this model the franchisee manufactures the product. The franchisor provides an essential ingredient or ‘know-how’ to the franchise. An example is the soft drink industry.

The cost of buying a franchise will depend on which one you select. You will be expected to pay an initial fee and an ongoing royalty fee weekly or monthly, or based on turnover.

Buying and running a franchise has similar tax implications to other small businesses. Refer to the Australian Tax Office for more information about franchising and tax.

You will also need to consider how you will finance buying the franchise; franchisors rarely fund prospective franchisees.

Advantages of franchising

• Association with an established brand, reputation, product or service.
• Assistance with lease negotiations, site development, and shop fit out.
• Assistance with buying equipment.
• Initial management training and ongoing support.
• Advertising and marketing support.
• Access to established standard procedures, operating manuals and stock control systems.
• Access to financial systems.

Disadvantages of franchising

• Less autonomy when making business decisions (franchisees generally have to operate according to a standard operating manual).
• You can only operate in a restricted area.
• Paying ongoing fees to the franchisor.
• Less control if you decide to sell your franchise; you will be required to follow certain procedures, including having your buyer approved by the franchisor.
• Restraint of trade provisions (limiting the actions you can take) when the franchise ends.
• At the end of the agreed period the franchisor is not required to renew the franchise, in which case the business and its goodwill goes back to the franchisor.

Franchises and retail leases

Most franchisees will need to lease commercial premises in which to operate. Before signing a lease make sure that you understand your rights and obligations. Seek professional advice before committing to the lease or signing a lease agreement.

Franchising Code of Conduct

The Franchising Code of Conduct (the Code) forms part of the Competition and Consumer Act 2010 and is regulated by the Australian Competition and Consumer Commission (ACCC).

The Code provides protection for franchisees in relation to:

• disclosure documents
• cooling off periods
• the management of marketing funds
• dispute resolution.

Before entering a franchise agreement, you should be provided with a copy of the:

• Code
• disclosure statement
• information statement
• franchise agreement.

Make sure that you conduct due diligence of the franchise and seek professional advice from an experienced business adviser, accountant or lawyer.

Evaluating a franchise

Before committing to a franchise it is a good idea to investigate the:

• operating system
• franchisor
• territory
• industry.

Read more about evaluating a franchise.

More information

• The ACCC website provides useful information about franchising
• The Franchise Council of Australia has more information about buying a franchise

Buying an established business requires a major commitment of time, money and energy. Doing your research before making a decision is essential.

Advantages of buying a business

• initial establishment and ground work has been done
• client base is established
• there is an existing market for the products/services
• a proven financial record that could make it easier to access finance.

Disadvantages of buying a business

• you may need to honour or renegotiate outstanding contracts
• the current staff could prove hostile
• you may need to invest additional money to make the business successful.

Identifying the right business

What is the ‘right’ business will vary, depending on your particular needs and lifestyle.

Before selecting a business check you:

• are physically, financially and emotionally suited to the business
• have the necessary skills, experience, time, resources, vision and commitment to make this business a success
• will benefit from this opportunity, bearing in mind your personal circumstances.

Businesses for sale are usually advertised in newspapers, industry magazines, and on the internet. Your accountant may also be able to assist, while business brokers and commercial real estate agents are also excellent resources. The Australian Institute of Business Brokers can assist in finding a broker.

Analysing the chosen business

Not all businesses for sale are a good investment. Before buying you need to understand exactly what you are paying for.

You need to:

• conduct due diligence and evaluate the risk
• have the business independently valued
• assess existing employees against your business needs
• investigate taxation requirements.

Due diligence and evaluating risk

Due diligence involves undertaking a thorough review of the business to determine the likelihood of its future success.

You will need to obtain the following information:

• Certified financial statements for the previous three years.
• A balance sheet to identify assets and liabilities.
• A list of the plant, equipment, fixtures and fittings the vendor intends to sell, along with a current valuation and associated warranties and guarantees. Before buying, confirm they can prove ownership.
• If the premises are leased, a copy of the lease agreement.
• If the business is a franchise, a copy of the franchisor’s disclosure statement. Learn more about buying a franchise.

Have the business independently valued

An independent valuation will confirm that you are paying a fair price. There are three main methods of valuing a business.

• Return on investment = net profit x 100 ÷ price
• Asset value = assets of the business + goodwill
• Market value = turnover x industry multiple. (This is rarely used for retail businesses).

Existing employees

If staff will be transferring with the business you need to be aware of your responsibilities. Specific requirements regarding the transfer of a business and employee entitlements will vary according to which industrial relations system the business is covered by.

For state system employees visit the Department of Energy, Mines, Industry Regulation and Safety website and for national system visit the FairWork Ombudsman website.

Taxation

Unless sold as a going concern, you will need to account for GST on the sale of the business. You also need to ensure all Australian Tax Office (ATO) requirements are met. Speak to an accountant or tax professional to understand your tax obligations or visit the ATO.

Other important points to check

• Is it reasonable to assume that profits will continue at the current levels?
• Will the profits cover loan repayments, the cost of maintaining and replacing business assets, and allow you to progressively recover your investment over the commercial life of the business?
• What is the condition and current market value of the plant, equipment and other assets?
• Is the goodwill of the business a realistic figure?
• Is the profit percentage higher or lower than industry standards?

Making an offer

Once you decide to purchase the business the next step is to make an offer to the vendor.

There is no standard documentation when buying a business. If you are not using a real estate agent or business broker you are likely to need a lawyer to draw up a legally binding offer and acceptance.

For your own protection make sure all promises and undertakings given by the vendor are confirmed in writing. Your lawyer should include appropriate conditions in the offer. This will allow you to withdraw your offer, without penalty, if the vendor does not meet these conditions.

After you agree on the price and terms of sale you will need to arrange the transfer of licences and registrations. For more information go to our licences and permits section.

To create the right image for your business and distinguish yourself from your competitors, you will need to ensure you register a business name.

Remember that a descriptive or generic name identifying the service or product you’re offering will make it easy for customers to work out what your business is offering. Think about whether the name will give you scope to grow and change what your business offers over time.

You can have multiple business names linked to your ABN. To register a business name, you will need to have an ABN or ABN application reference number. It is free to register your ABN.

Is it necessary to register a business name?

A national business name is held with the Australian Securities and Investment Commission (ASIC).

If you’re trading under your own name, there’s no requirement to register a separate business name. However, if you want to trade using a different name, then you will need to register this as a business name.

If you intend to operate under a company business structure your company name must be registered with ASIC.

Deciding on a business name

Your business name will create a first impression of your business so it’s worth putting in the effort to get it right. You might want to consider:

• What image do you want to communicate to clients?
• Is your proposed name easy to remember, pronounce and spell?
• Does the proposed name make a statement about the services and/or products you offer?
• Is any other business already using the name?
• Is the proposed name available to be registered as a domain name for operating or promoting your business online?
• Is the name available on social media channels you plan to use now or in the future?

Before registering a business name, you should undertake the following checks:

• See if the name is identical or similar to a registered trademark by using IP Australia trade mark search.
• If you would like to register a domain name in addition to your business name, make sure the domain name you want is available at Domain Administration – (auDA). Also check its availability for social media platforms you may plan to use.
• Search for any licences you may need to undertake for a particular type of business in WA.

Having a registered business name does not give you ownership of the name or the exclusive right to use the name. Registering a business name will not:

• stop another person from registering a similar name
• prevent the name being registered as a trademark
• prevent the name being used by someone that has already registered it as a trademark,
• protect you from legal action if the name of your business infringes the intellectual property rights of another (for example, a name which is a registered trademark).

The obligation to register a business name is a legal obligation which is entirely separate to steps that business owners may take to protect any intellectual property rights in a name or brand, such as registering a trade mark. Learn more about the difference between trademark, business name and domain name.

Registering a business name

Once you have checked the business name is available you will need to register it using the Business Registration Service or ASIC Connect. You will need to have an ABN and there is a fee payable to register your name.

For full information on how to register your business name, including user guides and videos, visit the ASIC website.

One of the key decisions you’ll make when starting a business is its structure.

Your choice of structure will depend on the size and type of business, your personal circumstances and how much you plan to grow the business.

You can change your business structure as your business grows or your circumstances change.

Your business structure can determine your:

• tax liabilities
• responsibilities as a business owner
• potential personal liability
• asset protection
• ongoing costs and the volume of required paperwork.

Comparing each business structure

The four main business structures commonly used by small businesses in Australia are compared below.

You may need licences to start or run a business in Western Australia. These will depend on your business type, your activities and your location.

Business licences and permits are important because they provide protection to you, your business and any employees; they ensure your business activities are allowed under Australian law; and enable you to trade without risk of fines or penalties.

Common business licences or permits relate to:

• Running your business from certain premises such as your home or a mobile van.
• Complying with specific laws such as taxation, or occupational health and safety requirements.
• Playing or using music in your business – including your workplace, telephone on-hold music, website.
• Doing certain types of work such as operating a food business, working from heights or removing hazardous waste.

How to use the Business Licence Finder

After answering a few simple questions your customised report will be ready to download in about five minutes. It will provide an itemised list of licences etc. you need, details about the agency responsible, costs and how long each licence etc. is valid for.

You can also choose to include information about industry codes of practice that may apply to you. Codes of practice are rules that explain how people working in a particular profession or industry should act. They make it as easy as possible to help business owners understand what they need to do to comply with registration. They are particularly important if you employ staff or have a business associated with health and safety. Penalties may apply if you operate without them.

Use the Business Licence Finder

Effective business planning can be the key to your success. A business plan can help you secure finance, prioritise your efforts and evaluate opportunities.

It may initially seem like a lot of work; however a well prepared business plan can save you time and money in the long run.

What should a business plan include?

There are no rules about what your plan should cover or the level of detail. In general, plans need to include information regarding:

• business profile
• vision, mission and goals
• market research
• operational strategy
• products and/or services
• marketing plan
• financial strategy.

Before starting your business plan

You may want to consider the following key questions to help determine if you are ready to start writing your business plan.

• Have you thoroughly refined your business idea so you have a good understanding of how your business will operate?
• Have you researched your business concept to determine if there is a need for it in the marketplace?
• Have you completed a feasibility study to determine expected level of success?
• Do you have the money required to start and grow the business?
• Are you prepared to invest significant time into the business to get it up and running?

How often should I review my business plan?

Business planning is an ongoing activity. Review plans regularly and update whenever your circumstances change.

You will require a number of skills to start and run a business.

It is important to identify the skills you need to develop or improve so that you can succeed in your day-to-day business operations.

These business skills are essential

Further your knowledge and skills

Running a business is a demanding task. Seek assistance if you are unsure about your abilities and skills. Developing the necessary skills will provide your business with solid foundations.

Starting a business is the beginning of an exciting – and sometimes challenging period in your life.

Suddenly you find yourself immersed in a whole new world of licensing, insurance, marketing and leasing – it’s easy to feel overwhelmed.

We have created a checklist to help guide you through the early stages of establishing your business. Follow the steps below to help you decide if you are ready to go into business, how to get started and where to seek help along the way.