Buying a Franchise

Buying a FranchiseA franchise business is a great way to own your own business with the benefit of support and security from a larger business network.

What is a franchise?

Franchising is a business relationship in which you (the franchisee) pay the owner of a business (the franchisor) for the right to market and distribute their goods or services over a fixed period.

Is a franchise right for you?

To help you determine whether buying a franchise is the way to go, consider the following:

  • Your wants and needs?
  • Your strengths and limitations?
  • Your skills and passions?
  • Your ultimate goal?

Knowing these things will help you decide whether a franchise will suit your character and circumstances and enable you to reach your goals.

Some advantages

A major advantage of buying a franchise is the knowledge that the products and services have been tried, tested and refined. Everything to do with establishing systems and procedures has been done by the franchisor – you just need to learn the ropes.

Chicken Franchise
Branding and trademarks that come with the franchise business give you immediate recognition, so the effort and energy that goes into promoting an unknown name is eliminated. Customers who see your business already know your products and services and know what they’re buying.

To get your business up and running smoothly, franchisors generally provide assistance and training at the outset and usually support along the way to help you keep going.

You may find it easier to secure finance for a franchise. It may cost less to buy a franchise than start your own business of the same type.

On the downside

One disadvantage of buying a franchise can be the substantial costs involved. Costs vary from one franchise to another depending on location and other things, but the total initial outlay is usually quite high. In addition, there are monthly royalty payments and ongoing fees to factor in. The fees may either be a fixed monthly amount or a percentage of turnover.

Buying a franchise means entering into a formal agreement with your franchisor. You lose much of your independence when it comes to creating your own ideas or experimenting with new concepts. Franchise systems are typically strict about procedures and appearance.

Buying a franchise can restrict the way you do business. Franchisors may place restrictions on what you sell, where you operate and how you do business. They may make business decisions that have a negative effect on your franchise. You need to be careful about the type of franchise you buy, and look to match your own strengths and weaknesses against the different franchises on offer.

Though not common, it’s worth mentioning that future profitability of your business and even your reputation could be threatened by the detrimental actions of another franchisee or an unfavourable business move by the franchisor.

Buying a franchise means ongoing sharing of profit with the franchisor so this is a recurring expense you must budget for.

Franchisors do not have to renew an agreement at the end of the franchise term so this is a significant risk you must take into account when comparing to setting up your own business.

Franchising Code of Conduct

“The Franchising Code of Conduct is a mandatory industry code of conduct that has the force of law under the Trade Practices Act 1974. The Franchising Code regulates the conduct of franchisees and franchisors, with the aim of ensuring that franchisees are sufficiently informed about a franchise before entering into it.

The code also provides a cost-effective dispute resolution scheme for franchisees and franchisors to resolve any disputes. The Australian Competition and Consumer Commission (ACCC) ensures compliance with the code and the Act by informing franchisors and franchisees of their rights and obligations under the code and enforcing it where necessary.” (Source: Overview of the Franchising Code of Conduct – www.accc.gov.au )

In conclusion

Purchasing a franchise does not guarantee success. Do your research first. Make sure you carefully assess the advantages and disadvantages of a franchise before entering into any contracts or agreements. Make sure you also understand your responsibilities as a franchisee.

If you decide on a franchise business, you will need to obtain the franchisor’s disclosure document at least 14 days before you sign any agreement or contract. Carefully read and understand the disclosure document, which will set out the costs, background of the business, any restrictions and what training and support will be provided. Ask questions if you don’t fully understand any portion of the document.

For more information, read The Franchisee Manual available at http://www.accc.gov.au under ‘Publications’.

FRANCHISE EVALUATION CHECKLIST

The franchisor:

What is its franchise reputation?How long has the franchise business been established and?
Who is the owner of the franchising organisation and what is their track record? Are they members of the Franchise Council of Australia?
Are they fully compliant with the Franchising Code of Conduct?
What support does the franchisor provide for training, purchasing, choosing a location, marketing and advertising?

The franchise product or service:

Are the products and services protected by patents, registered designs, trademarks or copyright?
What is current and potential competition?
Examine the projected sales &profits and how the figures have been determined?

The franchise agreement:

Has the franchisor complied with the disclosure documents in accordance with the mandatory Franchising Code of Conduct?
What is the term of the franchise and is there a renewal option. What additional fees are payable?
Does the franchise place restrictions to a territory?
Is there a minimum sales requirement of products and services to keep operating the franchise?
Can you resell the franchise? If so, are there any restrictions?
Can you continue in the same business after selling the franchise or termination?
Can the franchisor terminate the franchise? If so, under what conditions?
Is royalty/ commission payable to thefranchisor?
How much of the franchise cost must be paid up front? What do you get for this? What are the conditions?
What is the ongoing franchise fee? Are there additional fees for advertising or training?
What is the impact of on the franchise fees?

The franchise business premises:

Does the franchising agreement include the leasing of the business premises?
Do you or does the franchisor hold the lease over the premises?
Can the lease be terminated while you continue to hold the rights to the franchise?
What are your rights and obligations under the lease agreement?
Who owns the fit-out and other inclusions in the leased premises?

Financial considerations:

Apart from the cost of the franchise itself, what will be the cost of buildings, plant and equipment, fixtures, fittings and stock?
Is the product and equipment being offered at a fair market value?
Have you considered the best way to structure for tax and legal purposes (e.g. a company, partnership, sole trader or trust?)
Do your estimates of wage costs take into account holiday entitlements, overtime payments, the need to cover absent staff and superannuation obligations?
Have all the overhead costs been included in your financial calculations?
Will the business provide you with a fair return on your capital outlay, your personal effort and risk?

(source “accessing franchise opportunities” http://www.business.qld.gov.au)

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