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What is Franchising?

Franchising is one of Australia's fastest-growing business sectors.  A franchise is an agreement under which a franchisor licenses a franchisee to operate a developed method of doing business that is identifiably associated with the franchisor.  The franchisor provides ongoing guidance, systems and assistance in return for periodic payment of fees and/or purchases.  There are two basic kinds of franchises:

• A business format franchise in which the whole business concept is licensed, including the name, appearance and method of carrying on the business.
• A product franchise in which the product is manufactured and/or supplied by the franchisee.

Buying a franchise is unlike buying a conventional business. As a franchisee you enter a long-term relationship with your franchisor and you will be obliged to run the business in accordance with their system.  To a large extent your success will depend on the success of the franchisor.

Before you buy a franchise you need to assess all information and decide whether you are personally cut out to be a franchisee.  You need to weigh up the advantages and disadvantages, be aware of the taxation implications and have carefully read and understood the franchise agreement.

Before Entering a Franchise Agreement

Before you enter a franchise agreement obtain information on:

• demand in the marketplace for the service or goods on offer;
• a complete description of the business;
• the track record of the franchisor and current motives for franchising;
• what the franchisor has to offer by way of name, product, reputation, site location, advertising budget and back-up;
• how other franchisees are faring in the same business;
• evidence of the franchisor's strategic plan, ie where the business is going;
• the fees involved, ie up-front capital and percentage of takings which you have to pay to the franchisor for the continuing right to operate the business;
• terms of sale for goods supplied by the franchisor and if you can purchase stock from outside the franchise network;
• the franchise agreement document and the period of the franchise;
• obligations on both parties when the franchise is terminated, the number of agreements terminated recently and the reasons;
• territorial rights, ie exclusive or otherwise;
• whether there is a Franchise Operations Manual.

Warning Signs

Most franchisors are open and honest with you.  However, you should be wary of those franchisors (or master franchisees) who:

• are reluctant to provide anything in writing;
• are reluctant to give details of other franchisees within their system (required by the Code);
• require full up-front payment for the business to be made before any information is released;
• claim that you can make large amounts of money quickly and with little effort, ie it looks to good to be true.

And What About You?

Consider the above information in the light of your own strengths and weaknesses and your expectations:

• Do you have the type of experience required?  Are you ready for the hours and commitment needed?
• Will you be comfortable with the amount of control the franchisor will have?
• Is your financial position strong enough to see you through the first year?
• Are you suited to the industry and to the franchise company?
• Are you physically capable of the work required?

If you have any serious doubts on any of these points, think further and explore alternatives.

Franchising and Tax

• The initial franchise fee and any renewal fee will generally be regarded as a capital asset and is not deductible.
• An agreement to purchase a franchise often contains provisions covering the ongoing payments to the franchisor of royalties or levies.  These can be deductible in the year that they are incurred.
• Fees paid for ongoing training provided by the franchisor will generally be deductible.
• Interest paid on loans to pay the franchise fee or buy equipment may also be tax deductible.

Advantages of Franchising

• Easier access to finance with the support of the franchisor.
• Direct benefit from the franchisor's advertising and buying power.
• Use of an already established business name.
• Management and industry knowledge back-up.
• Reduction of business risk.

Disadvantages of Franchising

• Payment of fees and/or percentage of turnover and future resentment of same.
• Loss of some independence through franchisor control of management techniques.
• Unreliable franchisor.
• Over-dependence on the franchisor who may make mistakes.
• Reputation of a franchise may be affected by factors beyond the franchisee's control.

Franchise Agreement

A franchise agreement is a written document outlining the rights and obligations of both the franchisor and the franchisee.  It is a legal contract and much care should be given to its contents, for ultimately it contains the rules and regulations from which your future income will result.

Operations Manual

The Operations Manual sets out in detail how the franchise is to be run - leaving no room for misunderstandings or misinterpretation.  Every member of the franchise, although independently owned, must work to the rules set out in the Operations Manual.  Unity is an important factor in a successful franchise.

The Franchising Code of Conduct

On 1 July, 1998 the Franchising Code of Conduct, which protects the rights of franchisees and sets out the obligations of franchisors, came into effect.  All franchise businesses are required by law to comply with the Code.  By improving the disclosure requirements of franchisors and prohibiting "unfair" conduct, the Code has brought about significant change in the way franchise business is conducted.

The Code has been prescribed under the Competition and Consumer Act 2010 and the Australian Competition and Consumer Commission (ACCC) has the responsibility of enforcing the Code.

To assist franchisees in understanding the Code, the ACCC provides the Franchisee's Guide to the Franchising Code of Conduct.  Go to www.accc.gov.au and select Small Business Easy Access Point.

The Code also provides mediation procedures where disputes cannot be resolved within the franchise system.  Contact 1800 150 667 or visit www.mediationadviser.com.au (OFMA).

More Information

For franchising matters in general contact the Franchise Council of Australia Ltd (FCA) on 9264 4077 or visit www.franchise.org.au.

For the Franchising Code of Conduct and the Franchisee's Guide visit www.accc.gov.au.

For advice and protection in buying a franchise you should seek the services of a solicitor, accountant or business adviser.

Your local Business Advisory Service can offer you one-on-one advice on buying a franchise.  Call 1300 650 058.

Home-based business

Home-based businesses are an important sector of the Australian business community, with nearly one million people operating a business at or from home.

If you're running a home-based business there are a wide range of government requirements that may apply to you. Things to consider when running a small business from home include taxation, employment, council approval and licensing. Find links to what you need to know about setting up and running your home-based business below:

Planning

To run a successful home business you need to be able to handle a wide variety of issues. Think through the establishment of your business carefully, taking the time to research and plan your operations.

To develop your business plan, you need to consider these points about operating from home:

• Is your home the best location for your business?
• Can you conduct the type of business you want under local council regulations?
• What are your legal obligations?
• Will your home-based business allow you to balance your work and family life?
• What are the town planning requirements of your local government authority?

Getting started

When you set up your office, you may need new furniture, office equipment and information and communications systems. It's a good idea to shop around, compare prices, and ask for advice from other home-based business operators.

If you decide to rent or lease equipment, rather than buy, you may be able to claim the payments as a tax deduction - check the Tax Office website about business deductions.

The way you set up your business in your home may affect your tax deductions. See the Tax Office information on home-based work and deductions.

As you may be spending a lot of time there, make sure your workplace is a pleasant, comfortable and safe environment for you and your clients. WorkCover NSW can provide you with advice about occupational health and safety.

You may need to employ staff or outsource work to contractors and you'll have certain obligations to them. See our section on employing people for more information about their work conditions.

Registration & licences for home-based businesses

Our registration and licences topic has information about registration for all new businesses, whether it's in your home or in an office. You'll find information about how to register business and company names, registration for taxation purposes and where to go to find out about licences and permits.

But if you're using your home as a place of business then specific regulations may govern the impact of your business activities on the surrounding area, such as pollution, energy use and parking. Depending on your type of business, you may need special permits relating to zoning, signage, noise levels or health issues. Check with your local council to find out what restrictions and approvals apply to your business.

Taxation for home-based businesses

As with any new business, you'll have a number of tax obligations to comply with when starting up. You may need to register for a Tax File Number, Australian Business Number, Goods and Services Tax, Pay As You Go withholding and Fringe Benefits Tax.

But if you carry on a home-based business there are specific tax issues you should know about, especially what expenses you can claim. Two types of expenses that are specific to running a home-based business are:

• Expenses related to the area of your home used for business
• Travel expenses between your home and other business locations.

You may wish to join the Simplified Tax System which is an alternative method of determining taxable income if your small business has straightforward financial affairs.

Insurance for home-based businesses

As a home-based business you need to make sure you have the correct level of insurance to protect yourself. One of the most common mistakes made by home-based business operators is to assume that home and contents insurance covers their business risk - in many cases it doesn't. 

Insurances to consider are:

• Public liability cover for persons visiting your business at home (e.g. customers and suppliers)
• Workers compensation for any employees working from your home
• Fire, storm and theft cover for the loss of any stock and equipment
• Professional indemnity insurance if you're in a service industry, especially if you're contracting to government
• Personal accident or illness
• Costs arising from interruption to your business
• Marine policy if you send products via freight carriers or post.

It's important to note that many policies don't cover tools of trade, office furniture or computer equipment used for your business, unless you've specifically advised your insurer and they've agreed to cover you.

Independent contractor

On 1 March 2007 the new independent contractors laws were introduced, possibly affecting your tax, occupational health and safety and other obligations.

Visit the Independent contractor laws page on the Department of Innovation, Industry, Science and Research website for more information on how the laws affect you.

As an independent contractor, you should also consider the following issues:

How do I determine my status?

It is possible to be an employee for some work and a contractor for other work. The fact that you have an Australian Business Number (ABN) does not automatically make you a contractor. If you operate via a labour hire firm, you may not need to manage your own tax or occupational health and safety requirements and other obligations.

What are my taxation obligations?

Your taxation obligations

As a contractor, you may have to pay tax at a different rate to employees. You may also have to arrange to pay your own tax.

Personal Services Income (PSI)

PSI is income that is mainly a reward for personal efforts or skills, and can affect your tax obligations as a contractor. To find out how PSI will affect your tax return, use the following Tax Office resources.

What are my employment entitlements?

Superannuation

Some contractors are entitled to receive superannuation. If you are not covered, you may choose to arrange your own super contributions.

Entitlements

Unlike employees, contractors are not entitled to a minimum rate of pay or conditions such as annual leave, sick leave and redundancy entitlements. Your fees are a matter for negotiation between yourself and those you are contracting with.

OH&S laws

As a contractor, you are entitled to a safe and healthy workplace and are required to comply with the duties set out in the Occupational Health & Safety Act.

Workers compensation insurance

As a contractor, you may not be entitled to compensation unless you have arranged your own accident protection insurance.

How is my intellectual property affected?

Although you may have contributed to or created material, products and ideas as a contractor, you may not be entitled to intellectual property ownership such as copyright. This may depend on the work contract you sign.