Business model

A business model describes the rationale of how an organization creates, delivers, and captures value,[1] in
economic, social, cultural or other contexts. The process of business model construction is part of business
strategy.

In theory and practice, the term business model is used for a broad range of informal and formal descriptions to
represent core aspects of a business, including purpose, business process, target customers, offerings, strategies,
infrastructure, organizational structures, sourcing, trading practices, and operational processes and policies
including culture.

The literature has provided very diverse interpretations and definitions of a business model. A systematic review
and analysis of manager responses to a survey defines business models as the design of organizational structures
to enact a commercial opportunity.[2] Further extensions to this design logic emphasize the use of narrative or
coherence in business model descriptions as mechanisms by which entrepreneurs create extraordinarily
successful growth firms.[3]
Business models are used to describe and classify businesses, especially in an entrepreneurial setting, but they
are also used by managers inside companies to explore possibilities for future development. Well-known
business models can operate as "recipes" for creative managers.[4] Business models are also referred to in some
instances within the context of accounting for purposes of public reporting.
Business model patterns are reusable business model architectural components, which can be used in
generating a new business model. In the process of new business model generation, the business model
innovator can use one or more of these patterns to creating a new business model. Each of these patterns has
similarities in characteristics, business model building blocks arrangements and behaviors. Alexander
Osterwalder call these similarities the "business model pattern"

Definition[edit]
A business model is an "abstract representation of a business, be it conceptual, textual, and/or graphical, of all
core interrelated architectural, co-operational, and financial arrangements designed and developed by an
organization presently and in the future, as well as all core products and/or services the organization offers, or
will offer, based on these arrangements that are needed to achieve its strategic goals and objectives."[5][6] This
definition by Al-Debei, El-Haddadeh and Avison (2008) indicates that value proposition, value architecture (the
organizational infrastructure and technological architecture that allows the movement of products, services, and
information), value finance (modeling information related to total cost of ownership, pricing methods, and
revenue structure), and value network articulate the primary constructs or dimensions of business models. Al-
Debei, M. M., & Avison, D. (2010). Developing a unified framework of the business model concept.
European Journal of Information Systems, 19(3), 359-376.
Al-Debei, M. M., El-Haddadeh, R., & Avison, D. (2008). "Defining the business model in the new world of
digital business." In Proceedings of the Americas Conference on Information Systems (AMCIS) (Vol. 2008, pp.
1-11).

Business model design generally refers to the activity of designing a company's business model. It is part of
the business development and business strategy process and involves design methods. Massa and Tucci
(2014) [37] highlighted the difference between crafting a new business model when none is in place, as it is often
the case with academic spinoffs and high technology entrepreneurship, and changing an existing business

1
model, such as when the tooling company Hilti shifted from selling its tools to a leasing model. They suggested
that the differences are so profound (for example, lack of resource in the former case and inertia and conflicts
with existing configurations and organisational structures in the latter) that it could be worthwhile to adopt
different terms for the two. They suggest business model design to refer to the process of crafting a business
model when none is in place and business model reconfiguration for process of changing an existing business
model, also highlighting that the two process are not mutually exclusive, meaning reconfiguration may involve
steps which parallel those of designing a business model.

Massa, L., & Tucci, C. L. 2014. Business model innovation. In M. Dodgson, D. M. Gann & N. Phillips (Eds.),
The Oxford handbook of innovation management: 420441. Oxford, UK: Oxford University Press.

The concept of a business model has been incorporated into certain accounting standards. For example,
the International Accounting Standards Board (IASB) utilizes an "entity's business model for managing the
financial assets" as a criterion for determining whether such assets should be measured at amortized cost or
at fair value in its financial instruments accounting standard, IFRS 9.[20][21][22][23] In their 2013 proposal for
accounting for financial instruments, the Financial Accounting Standards Board also proposed a similar use of
business model for classifying financial instruments.[24] The concept of business model has also been introduced
into the accounting of deferred taxes under International Financial Reporting Standards with 2010 amendments
to IAS 12 addressing deferred taxes related to investment property.[25][26][27]

Both IASB and FASB have proposed using the concept of business model in the context of reporting a
lessor's lease income and lease expense within their joint project on accounting for leases.[28][29][30][31][32] In its
2016 lease accounting model, IFRS 16, the IASB chose not to include a criterion of "stand alone utility" in its
lease definition because "entities might reach different conclusions for contracts that contain the same rights of
use, depending on differences between customers' resources or suppliers' business models."[33] The concept has
also been proposed as an approach for determining the measurement and classification when accounting
for insurance contracts.[34][35] As a result of the increasing prominence the concept of business model has
received in the context of financial reporting, the European Financial Reporting Advisory Group (EFRAG),
which advises the European Union on endorsement of financial reporting standards, commenced a project on
the "Role of the Business Model in Financial Reporting" in 2011.[36]

1. International Financial Reporting Standard 9: Financial Instruments. International Accounting

Standards Board. October 2010. p. A312.

2. Jump up^ "The beginning of the end for IAS 39 - Issue of IFRS 9 regarding Classification and
Measurement of Financial Assets". Deloitte & Touche. November 2009. Retrieved 2011-06-03.

3. Jump up^ "Business Models Matter (for Accounting, That Is)". cfo.com. Retrieved 2011-06-03.

4. Jump up^ "An optimist sees the opportunity in every difficulty: is IFRS 9 an opportunity or a
difficulty?". Ernst & Young. December 2010. Retrieved 2011-06-03.

5. "EFRAG calls for candidates for an Advisory Panel on the proactive project on the Role of the Business
Model in Financial Reporting". European Financial Reporting Advisory Group. December 15, 2010.
Retrieved 2011-06-03.

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Definitions[edit]
Al-Debei and Avison (2010) define a business model as an abstract representation of an organization. This may
be conceptual, textual, and/or graphical, of all core interrelated architectural, co-operational, and financial
arrangements designed and developed by an organization presently and in the future, as well all core products
and/or services the organization offers, or will offer, based on these arrangements that are needed to achieve its
strategic goals and objectives.[5] This definition indicates that value proposition, value architecture, value
finance, and value network articulate the primary constructs or dimensions of business models.[7]
Economic consideration[edit]

1. Al-Debei and Avison (2010) consider value finance as one of the main dimensions of BM which depicts
information related to costing, pricing methods, and revenue structure. Stewart and Zhao (2000) defined
the business model as a statement of how a firm will make money and sustain its profit stream over
time. [38] Al-Debei, M. M., & Avison, D. (2010). Developing a unified framework of the business model
concept. European Journal of Information Systems, 19(3), 359-376.

2. Jump up^ Unpacking Sourcing Business Models: 21st Century Solutions for Sourcing Services, The
University of Tennessee, 2014
Design themes emphasis[edit]
Environment-Strategy-Structure-Operations (ESSO) Business Model Development
Developing a Framework for Business Model Development with an emphasis on Design Themes, Lim (2010)
proposed the Environment-Strategy-Structure-Operations (ESSO) Business Model Development which takes
into consideration the alignment of the organization's strategy with the organization's structure, operations, and
the environmental factors in achieving competitive advantage in varying combination of cost, quality, time,
flexibility, innovation and affective.[44]
Design content emphasis[edit]
Business model design includes the modeling and description of a company's:

value propositions

target customer segments

distribution channels

customer relationships

value configurations

core capabilities

commercial network

partner network

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 cost structure

revenue model
A business model design template can facilitate the process of designing and describing a company's business
model.
Daas et al. (2012) developed a decision support system (DSS) for business model design. In their study a
decision support system (DSS) is developed to help SaaS in this process, based on a design approach consisting
of a design process that is guided by various design methods.[45]
Daas, D., Hurkmans, T., Overbeek, S. and Bouwman, H. 2012. Developing a decision support system for
business model design. Electronic Markets - The International Journal on Networked Business, published
Online 29. Dec. 2012.

Examples[edit]
In the early history of business models it was very typical to define business model types such as bricks-and-
mortar or e-broker. However, these types usually describe only one aspect of the business (most often the
revenue model). Therefore, more recent literature on business models concentrate on describing a business
model as a whole, instead of only the most visible aspects.
The following examples provide an overview for various business model types that have been in discussion
since the invention of term business model:

Direct sales model

Direct selling is marketing and selling products to consumers directly, away from a fixed retail location.
Sales are typically made through party plan, one-to-one demonstrations, and other personal contact
arrangements. A text book definition is: "The direct personal presentation, demonstration, and sale of
products and services to consumers, usually in their homes or at their jobs."[47]

Franchise
Franchising is the practice of using another firm's successful business model. For the franchisor, the
franchise is an alternative to building 'chain stores' to distribute goods and avoid investment and liability
over a chain. The franchisor's success is the success of the franchisees. The franchisee is said to have a
greater incentive than a direct employee because he or she has a direct stake in the business.

Franchising is the practice of the right to use a firm's business model and brand for a prescribed period of time.
The word "franchise" is of Anglo-French derivationfrom franc, meaning freeand is used both as a noun and
as a (transitive) verb.[1] For the franchisor, the franchise is an alternative to building "chain stores" to distribute
goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the
franchisees. The franchisee is said to have a greater incentive than a direct employee because they have a direct
stake in the business.

Thirty-three countriesincluding the United States and Australiahave laws that explicitly regulate
franchising, with the majority of all other countries having laws which have a direct or indirect impact on
franchising.[2] Franchising is also used as a foreign market entry mode.

Franchising[edit]

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The franchising system can be defined as: "A system in which semi-independent business owners (franchisees)
pay fees and royalties to a parent company (franchiser) in return for the right to become identified with its
trademark, to sell its products or services, and often to use its business format and system." [13]
Compared to licensing, franchising agreements tends to be longer and the franchisor offers a broader package of
rights and resources which usually includes: equipment, managerial systems, operation manual, initial trainings,
site approval and all the support necessary for the franchisee to run its business in the same way it is done by the
franchisor. In addition to that, while a licensing agreement involves things such as intellectual property, trade
secrets and others while in franchising it is limited to trademarks and operating know-how of the business.[14]
Advantages of the international franchising mode:

Low political risk

Low cost

Allows simultaneous expansion into different regions of the world

Well selected partners bring financial investment as well as managerial capabilities to the operation.
Disadvantages of franchising to the franchisor:[15]

Maintaining control over franchisee may be difficult

Conflicts with franchisee are likely, including legal disputes

Preserving franchisor's image in the foreign market may be challenging

Requires monitoring and evaluating performance of franchisees, and providing ongoing assistance

Franchisees may take advantage of acquired knowledge and become competitors in the future

Other examples of business models are:

Auction business model

All-in-one business model

Chemical leasing

Low-cost carrier business model

Loyalty business models

Monopolistic business model

Multi-level marketing business model

Network effects business model

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 Online auction business model

Online content business model

Online media cooperative

Premium business model

Professional open-source model

Pyramid scheme business model

Razor and blades business model

Servitization of products business model

Business Model Canvas
Business Model Canvas is a strategic management and lean startup template for developing new or
documenting existing business models.[1][2] It is a visual chart with elements describing a firm's or
product's value proposition, infrastructure, customers, and finances.[3] It assists firms in aligning their activities
by illustrating potential trade-offs.

Formal descriptions of the business become the building blocks for its activities. Many different business
conceptualizations exist; Osterwalder's work and thesis (2010,[3] 2004[5]) propose a single reference model based
on the similarities of a wide range of business model conceptualizations. With his business model design
template, an enterprise can easily describe their business model.

Infrastructure

Key Activities: The most important activities in executing a company's value proposition. An
example for Bic, the pen manufacturer, would be creating an efficient supply chain to drive down costs.

Key Resources: The resources that are necessary to create value for the customer. They are
considered an asset to a company, which are needed in order to sustain and support the business. These
resources could be human, financial, physical and intellectual.

Partner Network: In order to optimize operations and reduce risks of a business model,
organization usually cultivate buyer-supplier relationships so they can focus on their core activity.
Complementary business alliances also can be considered through joint ventures, strategic alliances
between competitors or non-competitors.

Offering

Value Propositions: The collection of products and services a business offers to meet the needs of
its customers. According to Osterwalder, (2004), a company's value proposition is what distinguishes
itself from its competitors. The value proposition provides value through various elements such as
newness, performance, customization, "getting the job done", design, brand/status, price, cost reduction,
risk reduction, accessibility, and convenience/usability.

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 The value propositions may be:

Quantitative price and efficiency

Qualitative overall customer experience and outcome

Customers

Customer Segments: To build an effective business model, a company must identify which
customers it tries to serve. Various sets of customers can be segmented based on the different needs and
attributes to ensure appropriate implementation of corporate strategy meets the characteristics of
selected group of clients. The different types of customer segments include:

Mass Market: There is no specific segmentation for a company that follows the Mass
Market element as the organization displays a wide view of potential clients. e.g. Car

Niche Market: Customer segmentation based on specialized needs and characteristics of

its clients. e.g. Rolex

Segmented: A company applies additional segmentation within existing customer

segment. In the segmented situation, the business may further distinguish its clients based on
gender, age, and/or income.

Diversify: A business serves multiple customer segments with different needs and
characteristics.

Multi-Sided Platform / Market: For a smooth day-to-day business operation, some

companies will serve mutually dependent customer segment. A credit card company will provide
services to credit card holders while simultaneously assisting merchants who accept those credit
cards.

Channels: A company can deliver its value proposition to its targeted customers through different
channels. Effective channels will distribute a companys value proposition in ways that are fast, efficient
and cost effective. An organization can reach its clients either through its own channels (store front),
partner channels (major distributors), or a combination of both.

Customer Relationships: To ensure the survival and success of any businesses, companies must
identify the type of relationship they want to create with their customer segments. Various forms of
customer relationships include:

Personal Assistance: Assistance in a form of employee-customer interaction. Such

assistance is performed either during sales, after sales, and/or both.

Dedicated Personal Assistance: The most intimate and hands on personal assistance
where a sales representative is assigned to handle all the needs and questions of a special set of
clients.

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 Self Service: The type of relationship that translates from the indirect interaction between
the company and the clients. Here, an organization provides the tools needed for the customers to
serve themselves easily and effectively.

Automated Services: A system similar to self-service but more personalized as it has the
ability to identify individual customers and his/her preferences. An example of this would be
Amazon.com making book suggestion based on the characteristics of the previous book purchased.

Communities: Creating a community allows for a direct interaction among different

clients and the company. The community platform produces a scenario where knowledge can be
shared and problems are solved between different clients.

Co-creation: A personal relationship is created through the customer's direct input in the
final outcome of the company's products/services.

Finances

Cost Structure: This describes the most important monetary consequences while operating under
different business models. A company's DOC.

Classes of Business Structures:

Cost-Driven This business model focuses on minimizing all costs and having no
frills. e.g. Low cost airlines

Value-Driven Less concerned with cost, this business model focuses on creating
value for their products and services. e.g. Louis Vuitton, Rolex

Characteristics of Cost Structures:

Fixed Costs Costs are unchanged across different applications. e.g. salary, rent

Variable Costs These costs vary depending on the amount of production of

goods or services. e.g. music festivals

Economies of Scale Costs go down as the amount of good are ordered or

produced.

Economies of Scope Costs go down due to incorporating other businesses which

have a direct relation to the original product.

Revenue Streams: The way a company makes income from each customer segment. Several
ways to generate a revenue stream:

Asset Sale (the most common type) Selling ownership rights to a physical good. e.g.
retail corporations

Usage Fee Money generated from the use of a particular service e.g. UPS

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 Subscription Fees Revenue generated by selling a continuous service. e.g. Netflix

Lending/Leasing/Renting Giving exclusive right to an asset for a particular period of

time. e.g. Leasing a Car

Licensing Revenue generated from charging for the use of a protected intellectual
property.

Brokerage Fees Revenue generated from an intermediate service between 2 parties. e.g.
Broker selling a house for commission

Advertising Revenue generated from charging fees for product advertising.

Resources the main inputs that your company uses to create its value proposition, service its customer
segment and deliver the product to the customer.
Cash flow (canvas poate fi setat pe criterii si scenarii specifice, cum ar fi pe cash flow).
A cash flow describes a real or virtual movement of money:

a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to
another; the term 'cash flow' is mostly used to describe payments that are expected to happen in the future,
are thus uncertain and therefore need to be forecasted with cash flows;

a cash flow is determined by its time t, nominal amount N, currency CCY and account A;
symbolically CF = CF(t,N,CCY,A).

it is however popular to use cash flow in a less specified sense describing (symbolic) payments into or
out of a business, project, or financial product.
Cash flows are narrowly interconnected with the concepts of value, interest rate and liquidity. A cash flow that
shall happen on a future day tN can be transformed into a cash flow of the same value in t0.

Cash flow analysis[edit]

Cash flows are often transformed into measures that give information e.g. on a company's value and situation:

to determine a project's rate of return or value. The time of cash flows into and out of projects are used
as inputs in financial models such as internal rate of return and net present value.

to determine problems with a business's liquidity. Being profitable does not necessarily mean being
liquid. A company can fail because of a shortage of cash even while profitable.

as an alternative measure of a business's profits when it is believed that accrual accounting concepts do
not represent economic realities. For instance, a company may be notionally profitable but generating little
operational cash (as may be the case for a company that barters its products rather than selling for cash). In
such a case, the company may be deriving additional operating cash by issuing shares or raising additional
debt finance.

cash flow can be used to evaluate the 'quality' of income generated by accrual accounting. When
net income is composed of large non-cash items it is considered low quality.

9
 to evaluate the risks within a financial product, e.g., matching cash requirements, evaluating default risk,
re-investment requirements, etc.
Cash flow notion is based loosely on cash flow statement accounting standards. the term is flexible and can
refer to time intervals spanning over past-future. It can refer to the total of all flows involved or a subset of
those flows. Subset terms include net cash flow, operating cash flow and free cash flow.

Business' financials[edit]
The (total) net cash flow of a company over a period (typically a quarter, half year, or a full year) is equal to the
change in cash balance over this period: positive if the cash balance increases (more cash becomes available),
negative if the cash balance decreases. The total net cash flow for a project is the sum of cash flows that are
classified in three areas

1. Operational cash flows: Cash received or expended as a result of the company's internal business
activities.
so how to calculate operating cash flow of a project? OCF=incremental earnings+depreciation=( earning before
interest and tax-tax)+depreciation=earning before interest and tax*( 1-tax rate)+ depreciation= ( revenue - cost
of good sold- operating expense- depreciation)* (1-tax rate)+depreciation= ( Revenue - cost of good sold-
operating expense)* (1-tax rate)+ depreciation* tax. By the way, depreciation*tax which locates at the end of
the formula is called depreciation shield through which we can see that there is a negative relation between
depreciation and cash flow.

1. changing in net working capital. It is the cost or revenue related to the company's short-term asset like
inventory.

2. capital spending. This is the cost or gain related to the company's fix asset such as the cash used to buy a
new equipment or the cash which is gained from selling an old equipment.
The sum of the three component above will be the cash flow for a project.
And the cash flow for a company also include three parts:

1. operating cash flow: It refers to the cash received or loss because of the internal activities of a company
such as the cash received from sales revenue or the cash paid to the workers.

2. investment cash flow: It refers to the cash flow which related to the company's fix asset such as
equipment building and so on such as the cash used to buy a new equipment or a building

3. financing cash flow: cash flow from a company's financing activities like issuing stock or paying
dividends.
The sum of the three components above will be the total cash flow of a company.

Examples[edit]

Description Amount ($) totals ($)

Cash flow from operations +70

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 Sales (paid in cash) +30

Incoming loan +50

Loan repayment -5

Taxes -5

Cash flow from investments -10

Purchased capital -10

Total 60

The net cash flow only provides a limited amount of information. Compare, for instance, the cash flows over
three years of two companies:

Company A Company B

Year 1 Year 2 Year 3 Year 1 Year 2 Year 3

Cash flow from operations +20M +21M +22M +10M +11M +12M

Cash flow from financing +5M +5M +5M +5M +5M +5M

Cash flow from investment -15M -15M -15M 0M 0M 0M

Net cash flow +10M +11M +12M +15M +16M +17M

Company B has a higher yearly cash flow. However, Company A is actually earning more cash by its core
activities and has already spent 45M in long term investments, of which the revenues will only show up after
three years.

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Franchising is the practice of the right to use a firm's business model and brand for a prescribed period of time.
The word "franchise" is of Anglo-French derivationfrom franc, meaning freeand is used both as a noun and
as a (transitive) verb.[1] For the franchisor, the franchise is an alternative to building "chain stores" to distribute
goods that avoids the investments and liability of a chain. The franchisor's success depends on the success of the
franchisees. The franchisee is said to have a greater incentive than a direct employee because they have a direct
stake in the business.

Thirty-three countriesincluding the United States and Australiahave laws that explicitly regulate
franchising, with the majority of all other countries having laws which have a direct or indirect impact on
franchising.[2] Franchising is also used as a foreign market entry mode.

Fees and contract arrangement[edit]

Three important payments are made to a franchisor: (a) a royalty for the trademark, (b) reimbursement for the
training and advisory services given to the franchisee, and (c) a percentage of the individual business unit's
sales. These three fees may be combined in a single 'management' fee. A fee for "disclosure" is separate and is
always a "front-end fee".
A franchise usually lasts for a fixed time period (broken down into shorter periods, which each require renewal),
and serves a specific territory or geographical area surrounding its location. One franchisee may manage several
such locations. Agreements typically last from five to thirty years, with premature cancellations or terminations
of most contracts bearing serious consequences for franchisees. A franchise is merely a temporary business
investment involving renting or leasing an opportunity, not the purchase of a business for the purpose of
ownership. It is classified as a wasting asset due to the finite term of the license.
Franchise fees are on average 6.7% with an additional average marketing fee of 2% [6] However, not all
franchise opportunities are the same and many franchise organizations are pioneering new models that
challenge antiquated structures and redefine success for the organization as well as the franchisee.
A franchise can be exclusive, non-exclusive or "sole and exclusive".
Although franchisor revenues and profit may be listed in a franchise disclosure document (FDD), no laws
require an estimate of franchisee profitability, which depends on how intensively the franchisee "works" the
franchise. Therefore, franchisor fees are typically based on "gross revenue from sales" and not on profits
realized. See remuneration.
Various tangibles and intangibles such as national or international advertising, training and other support
services are commonly made available by the franchisor.
Franchise brokers help franchisors find appropriate franchisees.[7] There are also main 'master franchisors' who
obtain the rights to sub-franchise in a territory.
According to the International Franchise Association approximately 44% of all businesses in the United States
are franchisee-worked.

Rationale and risk shift[edit]

Franchising is one of the only means available to access venture capital without the need to give up control of
the operation of the chain and build a distribution system for servicing it. After the brand and formula are
carefully designed and properly executed, franchisors are able to sell franchises and expand rapidly across
countries and continents using the capital and resources of their franchisees while reducing their own risk.

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There is also risk for the people that are buying the franchises; failure rates are higher for franchise businesses
than independent business startups.[8]
Franchisor rules imposed by the franchising authority are becoming increasingly strict. Some franchisors are
using minor rule violations to terminate contracts and seize the franchise without any reimbursement.[8]

Obligations of the parties[edit]

Each party to a franchise has several interests to protect. The franchisor is involved in securing protection for
the trademark, controlling the business concept and securing know-how. The franchisee is obligated to carry out
the services for which the trademark has been made prominent or famous. There is a great deal of
standardization required. The place of service has to bear the franchisor's signs, logos and trademark in a
prominent place. The uniforms worn by the staff of the franchisee have to be of a particular design and color.
The service has to be in accordance with the pattern followed by the franchisor in the successful franchise
operations. Thus, franchisees are not in full control of the business, as they would be in retailing.
A service can be successful if equipment and supplies are purchased at a fair price from the franchisor or
sources recommended by the franchisor. A coffee brew, for example, can be readily identified by the trademark
if its raw materials come from a particular supplier. If the franchisor requires purchase from his stores, it may
come under anti-trust legislation or equivalent laws of other countries.[9] So too the purchase things like
uniforms of personnel and signs, as well as the franchise sites, if they are owned or controlled by the franchisor.
The franchisee must carefully negotiate the license and must develop a marketing or business plan with the
franchisor. The fees must be fully disclosed and there should not be any hidden fees. The start-up costs and
working capital must be known before the license is granted. There must be assurance that additional licensees
will not crowd the "territory" if the franchise is worked according to plan. The franchisee must be seen as an
independent merchant. It must be protected by the franchisor from any trademark infringement by third parties.
A franchise attorney is required to assist the franchisee during negotiations.[10]
Often the training period - the costs of which are in great part covered by the initial fee - is too short in cases
where it is necessary to operate complicated equipment, and the franchisee has to learn on their own from
instruction manuals. The training period must be adequate, but in low-cost franchises it may be considered
expensive. Many franchisors have set up corporate universities to train staff online. This is in addition to
providing literature, sales documents and email access.
Also, franchise agreements carry no guarantees or warranties and the franchisee has little or no recourse to legal
intervention in the event of a dispute.[11] Franchise contracts tend to be unilateral and favor of the franchisor,
who is generally protected from lawsuits from their franchisees because of the non-negotiable contracts that
franchisees are required to acknowledge, in effect, that they are buying the franchise knowing that there is risk,
and that they have not been promised success or profits by the franchisor. Contracts are renewable at the sole
option of the franchisor. Most franchisors require franchisees to sign agreements that mandate where and under
what law any dispute would be litigated.
Franchising code of conduct[edit]
On 1 January 2015, the old Franchising Code was repealed and replaced with a new Franchising Code of
Conduct. The new Code applies to conduct on or after 1 January 2015.
The new Code:

introduces an obligation under the Code for parties to act in good faith in their dealings with one another

introduces financial penalties and infringement notices for serious breaches of the Code

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 requires franchisors to provide prospective franchisees with a short information sheet outlining the risks
and rewards of franchising

requires franchisors to provide greater transparency in the use of and accounting for money used for
marketing and advertising and to set up a separate marketing fund for marketing and advertising fees

requires additional disclosure about the ability of the franchisor and a franchisee to sell online

prohibits franchisors from imposing significant capital expenditure except in limited circumstances.
These are significant changes and it is important that franchisors, franchisees and potential franchises
understand their rights and responsibilities under the Code.
For further information about the changes to the Code, please see the updated Franchisor Compliance Manual
and the Franchisee Manual.

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