Franchising accounts for about 4% of all small businesses in Australia. Annual sales revenue is around $150 billion and shows no signs of stagnating. Australia’s franchise sector continues to grow in total sales turnover and employment. We can see how and why franchising is becoming one of the most popular ways to do business in Australia. It is a way to offer small businesses the presence along with all the benefits of a larger business. It can have tremendous benefits for both the franchisee and the franchisor in a mutually beneficial agreement. In a world of information, it is our responsibility to inform ourselves to the best of our abilities on how to make a franchise work for us. No matter the side we find ourselves on, be it a franchisor or franchisee, there are certain things everybody needs to know. Here, we will cover the most important facts needed to grasp the concept of a franchise in Australia.
1. The associated costs
Depending on the type of franchise in question, costs for acquiring them can vary greatly. It depends on a multitude of factors. The selected industry and niche are some of them but there is a plethora of specificities that go into the calculation. First things first, there are upfront fees. Some might be less than $10.000, while others can exceed six figures. Initial investments such as these need to be calculated into our equation. Is it something that can coexist with our lifestyle, wealth and equity goals? Different franchises have different demands from their owner and the expenses might be spaced out completely differently. A food franchise would demand a high initial investment in terms of sanitation, equipment and staff. On the other side of the coin, a home-based b2b franchise would demand very little at first. It is up to us to decide what investments are worth going through and are worth our time and effort. The main question we need to ask ourselves is if it is in sync with our short and long-term goals. Further on, there are the costs of marketing, sales, customers service, etc. The increase in traffic is the key to success.
To get it out of the way, we should always be accompanied by our legal and financial advisors when considering acquiring a franchise. They say never sign something you have not fully read and they are right. This is where the franchise disclosure document comes into focus. For future reference, let’s refer to it as the FDD for short. Reading, analysing and understanding it thoroughly is non-negotiable. It is where all future operations and relations will stem from. There are certain sections of this document that require particular attention. The franchise’s history of past and current litigation is contained within. The first four items of the FDD relate to the franchisor’s experience. What that means is it checks whether the franchisor or other people in charge have ever been involved in a bankruptcy or litigation that is relevant to the brand. It is something that could give us insight into what we might expect from other parties if and when we start a joined operation. A potential past or ongoing litigation between the franchisor and a franchisee can point to a potential dissatisfaction with the brand. If it has happened with someone else, it might happen to us. Perhaps, it only alludes to the franchisor’s stern and strict rules and standards that serve everyone’s benefit at the end. The financial aspect is also covered within the FDD. Payments and revenue models are covered and it explains what we have to pay the franchisor and its affiliates. A big question is how much does a franchisor rely on franchisees for revenue. Item 19 and item 21 combined, will give us the information on how the franchise is doing financially. Item 19 is a financial performance representation. Item 21 represents the historical growth and revenue sources. Item 20 offers us the list of currently operating franchisees but also the ones that have ceased all operations with the franchisor. These franchisees can be contacted one on one for a first-hand experience on working with the franchisor in question. They can provide us with potentially great insight into potential struggles and the degree of profitability we could expect. Of course, multiple sources are always better than a single one. Therefore, we should ask these questions to each and every one of our contacts and see if we get consistent answers. It is worth noting that no one has a perfect track record and a degree of negative feedback is bound to be expected.
3. The market
Understanding the market is crucial if a franchise is to succeed. We can go for something trendy and fast or go with a wholesome, thought-out idea. It needs to be relevant to the area that we mean to conduct business in. When scouring through an area, we can use any number of tools such as the Chatime franchises tool. These will save us time, cost and effort dramatically. The reason it is important is that we need a strong and regular customer base. For that to be true, our franchise needs to be relevant in the area we are eyeing out. Further on, are there any market changes on the horizon that we can expect that will influence our business in a meaningful way? We need to be on the lookout for any factors that can change in the near future. The market, be it local or global, is an unforgiving place and there is much time, effort and money that we need to invest in order to stay afloat. Consider the market and calculate it into your equation when considering a franchise.
These are the three most crucial aspects to consider when thinking about buying a franchise. It does mean investing a lot of time, effort, research, knowledge and a bit of luck. With this information, we have a firm grasp of the basics towards a successful franchise partnership.