Franchising is, in simple terms, a way of doing business. Typically, through a contractual relationship, the Franchisor sells their products or services through a network of Franchisees who are independent owners that have been granted a right to sell those products and services. Many household names such as McDonalds, Subway, Jim’s, Boost Juice and Nando’s operate under a franchise model.
One perceived benefit of buying a franchise is that the Franchisee receives a lot of support from the Franchisor. The Franchisor may have a proven business model with a brand that is well-established and recognised within their market segment. This may provide Franchisees with an opportunity to step into a business with an existing cash flow which may assist in reducing business risk. It is important to note that an existing brand is not a substitute for reasonable due diligence and buyers of franchises should always exercise care and seek appropriate advice.
As mentioned above, a franchise relationship exists under a contract or franchise agreement between the franchisor and franchisee. This agreement includes details on the costs paid by the Franchisee to the Franchisor. These costs often represent remuneration for the Franchisor in proving services to the Franchisee that may include marketing, training, leasing and operational support. Whilst the franchise agreement will deal with these costs, it is noted they are often calculated on a fixed basis or as a percentage of turnover and sometimes a combination of the two.
Other benefits of operating a franchise include:
• Financial support from the franchisor such as equipment financing;
• Purchasing power when buying business inputs such as trading stock. This can help with improving margins;
• Some banks lend against the value of the business which can assist buyers with funding the business purchase without offering their home as security.
However, just because your business may be a franchise, ongoing business success is not a guarantee. Some reasons to consider not buying a franchise may include:
• Franchise agreements are generally legally binding, even for the Franchisee. Any breach by the Franchisee could result in the agreement being terminated and the business ceasing;
• There is limited scope for the Franchisee to operate outside the terms of the franchise agreement. For example, you can’t change marketing programs, logos, design fit-outs, recipes or menus.
• All Franchisees may be tarred with the same brush. Where one or more independently-owed franchises underperform, this may cause brand damage that impacts the entire network of Franchisees.
• Different mind-sets between Franchisor and Franchisee may impact the future growth and success of the business. Franchises typically work best where both parties have a shared vision.
A useful reference point for anyone looking to buy a franchise is the Franchising Code of Conduct. This Code is regulated by the Australian Competition and Consumer Commission and applies to both Franchisors and Franchisees. The Code details the information required to be provided by franchisors to franchisees together with a timeline for providing same. Reading the Code is highly advisable as it details the rights and obligations for franchisors and franchisees including documentation and procedural matters.
As always, we recommend you seek appropriate accounting and legal advice.
DISCLAIMER: This article is intended to provide a general summary only and should not be relied on as a substitute for professional advice.