If you are risk averse, or a first-time business owner, a franchise can be a good fit — although even established franchises, such as Angus & Robertson and Dick Smith, can still flounder and even fold in changing times.
However, there is no doubt franchises are big business in Australia, worth an estimated $146 billion, according to the Franchise Council of Australia. There are more than 1000 franchise systems operating around the country, which between them have licensed almost 80,000 franchisees that together employ about 460,000 people.
The cost of a franchise can vary depending on the model and brand. Service-based franchises, operated on a mobile basis, usually from home, can range from $5000-50,000 for a fixed term of around five years. Retail franchises, with a shopfront, fittings and stock, start around $50,000 and can surpass $250,000.
The trade-off for the security of operating under an established brand is that a percentage of profit returns to the franchisor. This can range from 2-15 per cent of turnover.
You will often have a manual to guide day-to-day operation, and the support of a network of fellow franchisees.
On the flipside, what is security to some can be a straightjacket for others.
Franchisees have little room to implement their own marketing or promotion ideas. Even adding a coffee machine to, say, an ice cream franchise, may prove tricky.
Likewise, you have little room to alter your business strategy to respond to market changes or new opportunities. It is also likely you will be locked into contracts with preferred suppliers at fixed costs.
Brand reputation may also be beyond your control. For example, if the franchisor, or another franchisee, does something to tarnish the brand it may impact your business too.
Tread with caution
Ryan Martin, Director of CCIWA’s legal practice, Business Law WA, urges caution to those looking to buy a franchise.
“There some people who enter a franchise with no idea how to run a business and have a false view and sense of security that most of it will be looked after by the franchisor,” he says. “Prospective franchisees need to have a real understanding of how to run a business.”
Martin says the basics of business still need to be attended to including:
- Is there enough demand in your chosen market place for the franchise goods and services?
- Will the terms of the franchise agreement allow you to make a buck?
“There is a big personal commitment to taking on a franchise and you are likely to be parting with a lot of money for branding, shop fit-outs and ongoing franchise fees. So you really need to do your homework.”
“For example, franchise agreements are geared to the franchisor and once you’ve signed it, it can be difficult to get out of,” Martin says. “If the business is struggling, the agreement will likely contain tight restraints and confidentiality provisions.”
His two top critical tips before starting a franchise are:
- Seek legal, accounting and business advice from people who’ve had significant experience working with franchises; and
- Ask other franchisees about their experiences with the company you’re looking to deal with.
“It’s very important to talk to other franchisees in the brand. Under the Franchising Code of Conduct, a full list of current and former franchisees must be provided by the franchisor as part of the disclosure information," he says.
"If you consult widely, you should get a very good picture of what it’s like to work with the franchisor and the realistic challenges and benefits of running a franchise business.”
“Contact those around the location you are considering and those in geographically similar areas. They should be happy to share their experiences with you.”
