Have you always wanted to start your own business but never had the confidence or the knowledge to do so? Is this a career change and is it right for you? Buying a franchise may give you that confidence and support selling a proven offering. This guide will look at the pros and cons of buying a franchise as well as helping you identify the right franchise opportunity.
A franchise, is a business opportunity that allows the franchisee (possibly you) to start a business by legally using someone else’s (the franchisor’s) brand, expertise, ideas, and processes.
Australia has three times as many franchised outlets based on per capita than the USA. Well known franchises include McDonald’s, Subway and Jim’s Mowing.
WHY consider buying a Franchise?
Franchises are offered in almost every industry in Australia. As an investor, you buy into an existing brand which, if you tried to set up yourself, could take you years to get into the same position.
Depending on which franchise you are interested in joining there is no guarantee that you will be accepted as a franchisee. It can be quite competitive especially when it comes to location and also due to franchisors selecting the franchisee they believe will make the business a success.
You should consider the:
- 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
- Less autonomy when making business decisions (franchisees generally must operate according to a standard operating manual)
- You can only operate in a restricted territory
- Paying ongoing fees to the franchisor
- Having to use specified suppliers
- Less control if you 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
WHAT do I need to know about franchising?
There are three types of franchise:
- Business – You have the right to use the franchisor’s intellectual property in your business, an example is Boost Juice.
- Product – You sell the franchisor’s product or service from a wholesale or retail outlet with exclusive rights within a specific area, for example Jim’s Mowing or a Mazda dealership.
- Processing or manufacturing – You manufacture the product and the franchisor provides an essential ingredient or know-how, such as Coca Cola.
Franchising in Australia is regulated by the Franchising Code of Conduct. The Code is mandatory and regulates the conduct of franchising participants towards one another. It covers:
- Disclosure requirements – the franchisor must be provided
- When interested in acquiring a franchise
- Information statement – 2-page document covering risks and rewards.
- If you decide to proceed
- Disclosure document – costs, supply restrictions, contract details of existing and former franchisees.
- Franchise agreement – legally binding document between you and franchisor.
- When interested in acquiring a franchise
- Good faith obligations – how you act to one another
- Dispute resolution mechanism – if a dispute remains after 3 weeks either party can refer the matter to mediation
- Cooling-off period for potential franchisees – you cannot sign for 14 days after receiving documents and you can terminate the agreement up to 7 days after signing
- Procedures for ending a franchise agreement – set out the terms for termination, renewal, end of term and transfer of the franchise
Some franchise systems require their franchisees to buy certain products from them or their specified supplier, known as supply restrictions. You might have no choice about where to buy some products.
The entry price of a franchise may seem like a good deal, but there may be further costs that you have to pay to establish and run your franchise. It’s important to understand the total costs you might have to pay.
HOW do I evaluate before buying a franchise?
If you are going to buy into a franchise, investing in some advice from a lawyer, accountant or business advisor with franchise experience will help you make a better decision. You should, however, consider the following when evaluating a franchise:
- Consider the effect on your family and lifestyle
- Question if the business interests you and if you are comfortable with investing
- Research the business, this may include getting expert advice.
- Age, size, uniqueness and reputation (including management team) of the franchise
- Understand all costs and fees beyond the initial outlay
- Understand franchisor directives around logo’s, uniforms, and future capital investments like a compulsory store refresh
- Be aware of what marketing support is provided and what your contribution will be towards that
- Ask to see demonstrations of processes or technology
- Understand how area territories work and if they are exclusive thus you will understand the competition from your franchise. Location is important.
- Understand what training is available
- Is the franchisor a member of the Franchise Council of Australia as this imposes certain ethical standards
- Ensure what you receive in writing matches what you have been told verbally
- Speak with existing and past franchisees to see if the opportunity has lived up to expectations
- What’s the work like?
- Any unexpected costs?
- How is the supply of product or service?
- What problems have you encountered?
- How supportive is the franchisor?
- How was the training?
- Was it a good investment?
- Ask about compliance checks performed by a franchisor
- Consider what your exit strategy looks like
Don’t assume the franchises will be a success.
Don’t assume you will not have to work hard in the business.
Understand your reputation is affected by the Franchisor, for example, 7Eleven underpaying employees.
Guides from the ACCC to help franchisees and prospective franchisees understand some of their rights and responsibilities under the Franchising Code of Conduct. https://www.accc.gov.au/publications/franchising-what-you-need-to-know
Franchise start-up checklist https://www.accc.gov.au/system/files/The%20franchisee%20manual__Mar%202019.pdf
Free pre-entry franchise education program https://www.franchise-ed.org.au/online-courses/pre-entry-franchise-education/
The Franchise Council of Australia has some further resources on this subject. https://www.franchise.org.au/
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) can assist in the resolution of franchising disputes. https://www.asbfeo.gov.au/franchising-disputes
SUMMARY – buying a brand, expertise, and processes
Buying a franchise can be a great way of starting your own small business. It comes with the security of an established brand, expertise, ideas, and processes, however, you will have less autonomy. The mandatory industry franchise code of conduct helps to protect all parties and provide a mechanism to resolve disputes. Before buying a franchise do your homework carefully and consider using the services of an expert in franchising.