Franchising – your checklist
So you’ve decided franchising might just be for your, now’s the chance to dig deeper into what it means.
In its online resources, the Australian Competition and Consumer Commission (ACCC) provides a long list of things for budding entrepreneurs to consider before buying into a franchise. These include, but are not limited to:
- Will you have an obligation to pay royalties, advertising or other fees? A percentage of profit goes to the franchisor under a franchise. This can range from 2-15 per cent of turnover.
- Is there a commitment to lease during the term of the franchise agreement?
- Are there any costs on the horizon that the franchisee will need to consider, such as an updated computer system, new uniforms or a change in the franchise branding (these costs would normally be paid by the franchisee under the franchise agreement).
- Will you be able to recover your outlay and make a profit during the term of the agreement?
- Do you have contingency funds? Franchisees, like any business, can run into cash flow problems if customers fail to pay on time. A lack of working capital is one of the major reasons for business failures and this can apply equally to franchises that fail to set aside contingency funds.
Products and services
- Do your own market research on the franchise products or services. If you are considering a new territory franchise, rather than an existing one — research the area. Demand for products or services is not the same in every geographical area. Look at the demographics, culture and spending habits of consumers within the area.
- Will the products or services face digital disruption?
- Is there a limit on the suppliers that you can buy goods or services from?
- Are you obliged to buy products from the franchisor and what are the costs?
- What are the quality and standards for products and/or services that will be imposed on you?
- What is the franchisor’s policy on selecting a site and/or territory for your franchise? How far away are other franchisees within the brand?
- Can you operate online? Can the franchisor compete with you online?
- Can the franchisor place restrictions on the way you operate the business? Are these viable?
- Is the franchisor obliged to discuss changes to the franchise system with all franchisees?
- Will your business benefit from franchisor advertising? CCI’s Workplace Relations Manager Ryan Martin says marketing fees are often not required to be targeted at promoting your specific business – you can end paying for something that your particular business may derive little, if any, benefit.
The franchise agreement
- If claims, such as any earnings guarantees, have been made to you by the franchisor, are they in the written franchise agreement?
- Can the franchisor terminate the agreement with the franchisee? An agreement may allow the franchisor to terminate the agreement even if there hasn’t been a breach by a franchisee.
- Do you have an automatic right to renew your agreement once the initial term is over? If not, investigate an exit strategy by looking at the rules around selling your business and see if there are any restrictions on you starting a similar business.