Buying a franchise
Buying a franchise is an alternative to starting your own business or buying an existing business that you might not have considered.
A franchise is a business structure where the buyer (the franchisee) pays a licensing fee to trade using the branding, trademarks, products, suppliers and systems of an established business (the franchisor).
You will need to consider if a franchise is the right business option for you by assessing:
- structure
- operation
- benefits
- risks.
Franchises are not available in all industries and some might not suit your style of business, so understanding the advantages and disadvantages will help you make an informed choice.
Being aware of market trends, purchasing options and the components of the Franchising Code of Conduct is also useful.
Key franchising concepts
Common franchising terms to be aware of include:
- franchisor – the owner of an established licensed business model, intellectual property (IP) and other collateral
- franchisee – the person that operates the individual franchise outlet or business using the business model licensed by the franchisor
- franchising – the relationship between the franchisor and franchisee
- franchise agreement – the formal contract between the franchisor and franchisee
Franchises involve the authorisation, through the franchise agreement, of the use of a company's products, services and marketing to an individual or group.
Franchisors commonly provide:
- marketing collateral including website images and content, display units, flyers and brochures
- branding and trademarks
- advertising agreements
- tools and equipment
- shop fit-out
- training and support for franchisees
- products, materials and supply agreements
- operating systems, processes and procedures.
Franchises cover various industries but not all. Common examples include:
- non-food service retailing (e.g. 7Eleven)
- food retailing (e.g. Red Rooster)
- administration and support services (e.g. PACK & SEND)
- rental and hire services (e.g. Hire a Hubby)
- education and training services (e.g. Tutor Doctor)
- finance and insurance services (e.g. TaxAssist Accountants)
- construction and trade services (e.g. Jim's Electrical)
- healthcare and social services (e.g. Home Caring)
- information media and telecommunication services (e.g. Create Business).
Advantages and disadvantages of buying a franchise
Franchises can have many advantages over starting a new business, but they also have risks and restrictions and are not guaranteed to be successful. And there are time commitments to consider—the initial franchise terms are usually based on a 5-year agreement.
Review the advantages and disadvantages listed for different aspects of franchising to help you decide if buying a franchise is right for you.
Advantage – buying an established, well-known brand
Disadvantage – potentially too many franchisors in the market with the same products and services
Consider:
- What trends affect the brand?
- Is it trending up or down?
- What is the reputation of the franchise brand?
Advantages – tried and tested, from a larger established business
Disadvantages – cannot set up your own systems
Consider:
- Has the franchisor protected the brand, products and services (e.g. with trademarks)?
- Is the franchisor sufficiently large and established?
- Franchisors need 20–30 franchisees to fund their business model. Are you prepared for the risk of buying a franchise from a franchisor who is still becoming established?
Advantages – franchisor helps identify the location and fit-out of retail premises
Disadvantages – franchisor chooses a location or fit-out that may not suit you
Consider:
- Franchises often have defined geographical territories—does the proposed location work for you and your personal life?
- Is the territory available in a commercially attractive area?
- How many competitors are nearby?
- What will be the effect if the premises is in a large shopping centre where leases are high-cost and controlled by the centre?
- Would you be prepared to work every day the centre requires you to be open?
- How often will the fit-out be updated and how much will that cost you?
Advantages – chosen and established, meaning less time researching and finding products and suppliers
Disadvantages – limited to what you are permitted to sell and able to buy from other suppliers
Consider:
- Are you prepared to have established products and services but have limits and restrictions on what you sell?
- Would you prefer to make your own decisions about the products and services you want to sell?
- How innovative is the franchisor?
- Does the franchisor bring in new products and services (e.g. new models)?
Advantages – training material already in place and does not need to be developed
Disadvantages – may be limited and not satisfactory for your needs
Consider:
- Are you confident to start in business without any experience or training?
- How much training will the franchisor provide at the beginning and during the agreement?
- What will happen if you need more training?
- Will training or support come at an added cost?
Advantages – purchase covers all that is needed to run the business (e.g. the business model, marketing system, suppliers, policies and procedures)
Disadvantages– initial set-up costs and ongoing costs may be expensive
Consider:
- Should you take advantage of the faster set-up of buying a franchise so you can start trading sooner?
- Is it beneficial for you that lenders may be more likely to finance the purchase of an established business model?
- You will pay a percentage of your profits to the franchisor. If the business is not achieving enough profit, are you prepared to still pay? This may mean you will not be compensated for your own efforts.
- What percentage will the franchisor take?
- You must use the franchisor’s chosen suppliers. Are you prepared to pay when the franchisor may include a high mark-up for themselves in the price of supplied goods?
- Is it an issue if you may not be permitted to deal directly with the supplier to negotiate rates?
- There is no guarantee that the franchisor will renew your agreement when it expires. Are you prepared for the effects of this on your finances?
- What are the minimum performance criteria you need to meet? What are the consequences if you do not meet them?
Advantages – franchisor owns the business model and controls the direction of the business
Disadvantages – unable to direct the business and the franchisor might not make the best decisions
Consider:
- How will you deal with the franchisor making business decisions that could hurt your business (e.g. commences more agreements with new franchisees in your location)?
- Some franchisors own many franchises. Will you be affected if these brands compete with what you sell or provide?
Advantages – franchise brand will assist with business growth
Disadvantages – franchisor may develop a poor reputation and you could suffer the consequences
Consider:
- Are you prepared for the reputation of the established business being an important part of the success of all franchisees?
- How will you manage if the franchise develops a poor reputation that is publicised and negatively affects all franchisees despite your own positive performance?
Business skills for franchisees
For your franchise to run smoothly, you will need to have various business skills for day-to-day operations, for example:
- managing operations
- managing staff
- customer service
- managing time
- sales.
Evaluate your skills for being a franchisee
To help you decide that franchising is right for you, see the following:
Choosing the right franchise
Choosing the right franchise requires due diligence. You should explore franchises that interest you, but you should also investigate the franchisor and all aspects of the franchise to make sure you are fully informed. The help of independent business advisers can make this a manageable task.
Successful franchises have:
- a proven business model that is easy to replicate
- the ability and appetite for change and innovation as the market evolves
- tested marketing strategies and resources
- buying power with suppliers
- outstanding operations support.
It is important to understand the industry you intend to operate within and monitor current market trends and movements.
For example, purchasing in non-essential markets—such as leisure activities, entertainment and high-end apparel—can fluctuate as essential household expenses increase, such as food and petrol. This leads consumers to be concerned about repaying household debt and could cause irregular cashflow for your business.
Franchisors must not give franchisees information that is misleading or deceptive and must follow the code of conduct.
Due diligence on your part will also include other documents around leases and contracts.
Find franchise opportunities
You can find franchises available to buy at:
Franchising Code of Conduct
The ACCC manages the Franchising Code of Conduct and provides education for people intending to buy a franchise. The ACCC also requires the franchisor to give you 5 key documents at least 14 days prior to signing a franchise agreement or making a non-refundable payment.
These 5 documents are:
- Information statement about franchising
- Copy of the franchise agreement
- Disclosure document explaining details about the franchisor and the business
- Factsheet to help you understand the disclosure document
- Copy of the code of conduct.
If you, as the franchisee, are leasing a premise from the franchisor, they must provide:
- a copy of the lease or the agreement to lease
- details of any incentives or financial benefit the franchisor is entitled to receive because you have signed the lease or agreement to lease.