Why franchise a business?
Franchising a business can be a very profitable way of expanding a successful existing business. Many well-known brands such as McDonalds, Domino’s Pizza, have used franchising to finance and accelerate their growth from local businesses into leading global brands, whilst other Australian home grown franchises such as Eagle Boys Pizza have used franchising to become a household name throughout Australia.
Australia is the most-franchised nation (per head of population) in the world; this means that awareness to franchising is at an all time high. Many individuals and organisations with existing businesses therefore see franchising as an easy route for expanding their business and getting rich quick. You will also be amazed by how many people ask us for help to franchise an idea they have!
Franchising is not a testing ground for a brand new business idea. You need to be running a successful business for a sustained period of time before you can consider going down the franchise route.
Once you have a successful business and want to look at franchising it, you still need to determine if your business is suitable for franchising. If so, you will need to look at how to set it up properly at a franchise.
Australia also has some of the world’s most stringent franchising legislation (primarily intended to protect franchisees who may have little or no business experience) which means there is no margin for error for new franchisors.
This is where NB Lawyers can help you. Working closely in conjunction with your business advisor and accountant, we can assist in preparing all of the legal documentation required to roll out your new franchise, including master franchise agreements, individual franchisee agreements, trademark registration and associated IP licence agreements, as well as documenting any business systems and training manuals.
Is your business “franchiseable”?
Though most business concepts can be franchised, there are some that are not suited for franchising.
In summary, a “franchiseable” business in Australia would ordinarily need to be:
- Credible – your concept needs to be proven with a good track record and an experienced management team. It needs to have good local press and public acclaim.
- Profitable – franchising is not a means of rescuing a business that is under-performing, a business needs to be already successful and generating a sufficient gross profit margin to allow you and your franchisees to make money.
- Unique – your business needs to have a unique selling point that will allow it to be differentiated from competitors which in turn, will make it more attractive to potential franchisees.
- Licensable – you need to have a business where the intellectual property, systems, procedures, expertise, skills and know-how can be identified and licenced to potential franchisees.
- Teachable – you need to make sure all the systems are in place and the operating systems of the concept documented in manual form. You should also be able to train others in three months or less in the use of your systems and procedures.
- Supporting – you need to have or be able to acquire the ability to provide ongoing support to your franchisees.
- Affordable – if the franchise is very expensive there will be very few people who could afford to buy into your network.
What are the benefits to franchising your business?
- Spread the risk – As it’s also the franchisee’s capital and future that is at risk, it’s in their interest to give 100% to the business to ensure its success.
- Lower overheads – capital is always scarce in growing a business, but by going down the franchise route, the capital needed to expand your business is provided by the franchisee. Advertising and marketing costs can also be shared amongst all franchisees.
- Building the brand – as your franchise grows, so does the visibility of your brand. Through franchising, you can turn a local Australian brand into a national and even global brand name.
- Regular revenue – the ongoing fees your franchisees pay will develop to be a significant revenue generator for you to help expand your business even further.
- Maximum growth – there is no other way to grow as rapidly as franchising allows, through the collective power and effort of multiple franchisees all working towards a common goal.
- Greater buying power – franchisors tend to buy inventory and plant and equipment in bulk for the entire franchise system, giving greater buying power and lower prices. This enhances profit margins and gives the franchisees a strong advantage over all competitors.
- Securing prime locations – as a franchising system grows, so does its reputation in the market. Landlords looking for low risk, financially viable tenants are more likely to lease prime retail and commercial property to a recognised business.
- Market dominance – by growing rapidly, franchises are able to set up multiple businesses in a given market, essentially pushing out the competition.
What are the disadvantages to franchising a business?
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- Substantial set up costs involved you need to be realistic about the cost of establishing a franchise network in Australia.
Taking into account the cost of legals and compliance, accounting and marketing, the total start-up costs would be between $20,000 and $50,000 (or possibly more). The overall cost to franchise your business depends on the quality and extent of advice a potential franchisor is prepared to pay for, how much the franchisor is prepared to do themselves, and the complexity of the business to be franchised.
- Substantial set up costs involved you need to be realistic about the cost of establishing a franchise network in Australia.
The development of the franchise agreement is a critical step in this process. It really is a job for only qualified and experience franchise lawyers such as NB Lawyers. Although this can be one of most expensive components of establishing a franchise system, it is also the most critical to the long-term protection and viability of the business to be franchised.
- Loss of control – In a traditional franchising system, each franchisee owns and operates their business in their own right, from a decentralised location, potentially thousands of kilometres away from your head office.
Although you do not have “hire and fire” rights over them, you can still monitor compliance with the franchised system and manuals, to ensure the business is operating and performing in line with the system.You also need protect your business from franchisees who may get greedy and try to replicate your concept and steal customers/clients away from the franchise system.
It is these areas where your franchise agreement, carefully drafted by legal experts such as NB Lawyers, is critical.
- Finding the Right Franchisees – it can be tempting in the early stages to simply recruit those with the required investment funds to help get your franchise up and running. This can be fatal to your long term goal, as the wrong franchisees can damage the foundations of your franchise and bring the whole business into disrepute. All potential franchisees should be subject to strict selection criteria and due diligence undertaken on them.
- Managing Growth – to manage a large franchise network, you need to make sure that you have the required support staff to serve the needs of your franchisees. It is a contractual obligation of most franchise agreements to provide this ongoing assistance to franchisees. If they don’t get the necessary support, they may terminate their agreement, or at the very least, they may run into difficulties, thereby impacting their business and yours.
- Conflict Between Franchisee and Franchisor – The biggest negatives in franchising are the conflicts or disputes between the franchisee and franchisor, which in the extreme cases can lead to litigation. When franchisees are making money they are happy, but if they are not, then the usually blame the franchisor. Allegations commonly made by franchisees, include a lack of support, inadequate training, territorial problems , misrepresentation and even fraud. Frequent communication, adequate support, comprehensive operations manuals and a watertight franchise agreement can help combat these issues.
Should you wish to discuss with one of our legal experts whether franchising is right for you and your business, please pick up the phone and call NB Lawyers today on 07 3876 5111.
Written by
Jonathan Mamaril
Principal & Director, NB Lawyers – the Lawyers for Employers
07 3876 5111
[email protected]