Grabbing a bite of the profits from the world’s biggest hamburger chain, McDonald’s, might be tempting for any prospective businessperson. However, “Maccas” is just one of a number of global and local brands currently available to buy as a franchise in Australia – a sector worth $131 billion.
Particularly for new operators, the benefit of an established brand, infrastructure and support can make acquiring a franchise an easier introduction to the world of business. But as seen in recent high-profile cases, potential franchisees need to conduct thorough due diligence before buying to ensure the franchise’s projections match reality.
On top of that are the restrictions involved in being part of an established operation, with limitations on entrepreneurial activity and potential financial rewards compared to running your own business.
Pro: Getting a head start
The popularity of franchising is shown by the more than 1200 franchise opportunities currently listed on the Franchise Council of Australia (FCA) website, ranging from food businesses such as Domino’s Pizza to Dymocks bookstores, Snap printers and TeleChoice phone outlets.
According to the FCA, franchise fees can range from as little as $5000 to more than $1 million, depending on the type of business. Franchisees usually are required to pay ongoing fees for support, either a fixed monthly amount or percentage of turnover.
In the most typical model of business format franchising, the franchisor provides the franchisee with all the tools, including not only the product but the entire marketing strategy and operational systems as well as training and quality control.
Pro: Reducing start-up risk
The high risk of small business failure can be an incentive to join a larger network with an established presence and support. According to ABS data, just over half of new businesses in Australia fail within four years.
Many large franchise systems have rigorous selection criteria for new franchisees aimed at ensuring they attract people with the right skills. For new franchisees, this means that they will be joining a network with certain standards and benefits that the existing operators will strive to protect.
Con: Legal risks
Court actions filed by disgruntled franchisees show the risks involved in the legal process for both parties.
According to Jason Gehrke, director of the Franchise Advisory Centre, prospective franchisees should test all the assumptions they are given prior to signing an agreement.
“My recommendation for a first-time business owner, and especially for a first-time franchisee, is for every $1000 to be invested in the business they should spend an hour of their time researching what they’re getting into,” he told BRW magazine.
Franchise contracts can range from one year to eternity, and as the FCA notes, “The franchise agreement will be imbalanced in favour of the franchisor, as the franchisor must at all times remain in control over certain standards critical to the ongoing success of the business format.”
Con: Restricted entrepreneurship and business risks
Having your own business means having complete control over branding, marketing, products and services. In short, you are your own boss with all the resulting risks and benefits.
By contrast, being part of a franchise means paying a portion of profits to the franchise network, as well as being bound by the strategic plan determined by headquarters. It can be difficult to unleash your entrepreneurial vision when the sign on the door says you are running a specific type of business.
In addition, if the franchisor fails then franchisees can be dragged down with it, as seen with the collapse of Angus & Robertson, Kleenmaid and others.
For those undecided, the FCA advises the following considerations prior to buying a franchise
- Assess your reasons for wanting to own a business, along with the lifestyle and income implications.
- Read the Franchise Guide and conduct thorough due diligence on the proposed business.
- Ensure you have adequate borrowing capacity, including working capital.
- Obtain legal and accounting advice from professionals with franchise experience.
- Use the cooling-off period to check your facts and figures before deciding whether to proceed.
Buying a franchise can be a complex decision, but by doing appropriate research and avoiding the pitfalls it can prove rewarding for the right person.[Sources]