How do changes to the franchising code affect your beauty business?

If you have a successful business that you want to expand, you can consider franchising. If managed well, it can open your product or service to new markets and extend your brand’s reach.

There is no specific franchise registration or approval process, but establishing a franchise is a legal process and can take some time.

Not every business will suit expansion through a franchise model. If you do decide a franchise model is right for you, recruiting new franchisees can be challenging.

Not everyone is suited to franchising, of those who are, not everyone will suit your brand. Recruiting the wrong person could cost your brand more over time than it would to recruit the right candidate. Research shows that while digital marketing attracts the highest quantity of enquiries, the best franchisee candidates come from people already working in your business or through referrals from existing franchisees.

Before you franchise your salon

Get advice
It’s important to get professional advice from an accountant, lawyer and business adviser with expertise in franchising. 

Make sure you have a successful and proven franchise model
Operating your own franchise model before selling a franchise to someone else can help prove your concept, establish demand and create good processes and systems that can be repeated in each new franchise. Conduct due diligence by researching the franchise system and talk to other franchisors and franchisees.

Complying with the law
As a franchisor, you must comply with the law of contract, Franchising Code of Conduct and Australian Consumer Law (ACL).

A franchise agreement is a contract that contains legal rights and obligations.

The Franchising Code of Conduct requires franchisors to disclose certain information to both potential and existing franchisees. It also sets out minimum conditions relating the rights of the parties under a franchise agreement.

Under the ACL you must not use misleading, deceptive or unconscionable conduct in your business dealings.

Independent legal advisers can assist you to understand other federal and state laws that affect franchising your business. For example, there are workplace laws that affect certain franchisors. Franchisors can be held responsible for their franchisees’ conduct and subject to enforcement action, court proceedings and penalties if their franchisees have contravened the Fair Work Act 2009 (FW Act).

Working relationship with franchisees
If you decide to franchise your business, it’s vital that you have a good working relationship with your franchisees. Take care when you select a franchisee to ensure they are a good fit for your franchise business. Under the Franchising Code you must act in good faith in your business dealings with each other.

Franchise tax obligations
As a franchisor, you need to understand your tax obligations and how franchising fees are treated for tax purposes. It’s also important to review your income tax and goods and services tax (GST) reporting requirements. In most cases all payments you receive from a franchisee will be assessable income. They will also involve GST.

As with any business, your business structure, assets and income will determine your taxation requirements.

Record keeping obligations
By law, you’re required to keep written material that the Franchising Code requires, or allows a franchisee or prospective franchisee to provide to you.

The documents you must keep include:

  • requests for a disclosure document
  • notices of dispute
  • confirmations of receipt of disclosure document
  • professional advice statements
  • requests to transfer a franchise to a third party (and any additional information provided regarding the transfer)
  • requests not to disclose former franchisee details
  • any documents that you use to support any claims or statements made in your disclosure document

You must keep your records for six years from when they were created. The Australian Competition and Consumer Commission (ACCC) can request the documents in accordance with its power to conduct checks of a franchisor’s compliance with the Franchising Code.

For more news and updates, subscribe to our weekly newsletter