Newsletter 21 January 2015

Business Franchise Australia and New Zealand

New powers for ACCC will strengthen franchising industry


Changes to the mandatory Franchising Code of Conduct came into effect on 1 January 2015. The Australian Competition and Consumer Commission has new powers to:

  • issue infringement notices of $8,500 for body corporates ($1,700 for individuals and other entities) and
  • seek penalties of up to $51,000 in court for serious breaches of certain Code provisions.

“The ACCC welcomes these changes to the Franchising Code as valuable additions to our arsenal. Rogue operators should be on notice that the ACCC can now seek significant penalties for serious breaches of the Code,” ACCC Acting Chair Dr Michael Schaper said.

“However, these new powers will go unnoticed by the vast majority of franchisors and franchisees who do the right thing.”

The changes introduce a good faith obligation into the Code. This obligation requires both parties to a franchise agreement to remain loyal to the contract that they have signed.

Acting dishonestly, for an ulterior motive or in a way that undermines or denies the other party the benefits of the contract would breach the good faith obligation.

Read more here.

2015 FCA Excellence in Franchising Awards regional categories open!

Following the success of the 2014 FCA Excellence in Franchising Awards, there has never been a better time to enter your system and people into the running for the 2015 edition of these prestigious awards.

Success at the awards generates priceless publicity and promotion for individuals and their franchise systems – it is direct marketing exposure you cannot afford to miss.

FCA General Manager, Kym De Britt said the awards provide business owners the opportunity to take a very good look at their business and how it operates in the current market, which provides valuable insights into the mechanics of how it runs.

“The awards were refreshed in early 2014 to reflect the current way of doing business and serve as an excellent way to monitor your own business performance. Should you be successful, it is also an opportunity to see your brand’s name up in lights, and market your award-winning system to potential franchisees,” Mr De Britt said.

Regional categories close on 23 March 2015, with full submissions to be provided by 1 April 2015. The awards will be announced at gala dinners around the country.

Click on each of the regional categories below to read about the criteria and to download an entry form.

- Multi-Unit Franchisee of the Year
- Franchisee of the Year, two or more staff
- Franchisee of the Year, less than two staff
- Franchise Woman of the Year
- Field Manager of the Year
- Franchisee Community Responsibility and Contribution

This is an exceptional opportunity to recognise excellence within your franchise system and gain positive exposure in and beyond the sector.

National categories will open on 13 April 2015.

On your marks, get set, Rock, Pop and Go!

Choose It. Mix It. Smash It. Love It… and you could ‘POP’ around town in a brand new Fiat 500 Pop

Ringing in the new year in true Cold Rock style, the iconic Australian Ice Creamery is giving its customers the ultimate chance to sit in the driver’s seat and ‘POP’ around town this summer, sporting some hot new wheels, while dreaming up their very own custom-designed Cold Rock Combo.

Officially kicking off on Monday, 12th January, Cold Rock Ice Creamery is calling ice cream aficionados far and wide to get behind the wheel to create and then name their ultimate Cold Rock Ice Cream and Mix In combination, for the chance to win an ice cream-coloured Fiat 500 POP.

Valued at over $17,000, the prize means that by enjoying your favourite Cold Rock Combo and dreaming up your own cool-treat creation, you’ll not only be tantalising your tastebuds this summer, but also given the chance to drive away with a sweet new ride.

Read more here.

Where to turn for franchise funding? by Darryn McAuliffe at FRANdata Australia

You’ve done your research, found a franchise brand that meets your requirements and had the green light from your advisors to proceed. What next?

Unless you are one of the fortunate minority that has existing cash reserves from sale proceeds of a previous business, severance payments or even cash from personal assets, you will need to borrow.

Franchise funding generally comes from one of several sources:

Friends and family:
This relatively minor provider of finance tends to be more active with lower entry cost brands and is often aligned with younger franchisees yet to accumulate a sufficient amount of their own equity to complete the transaction. It can be a fast, cheap and simple type of funding; backed by those that know, trust and have a very personal desire to see the franchisee succeed. This can be a  terrific form of finance but should also be taken on with some clear ground rules around when and how it will be repaid.

The franchisor:
This is a growing (and not necessarily positive) trend. A number of franchisors, frustrated with traditional lenders or desperate to convert less capitalised (but otherwise apparently strong potential business partners) into franchisees are effectively financing those new franchisees into their systems. This can be done through direct lending or by using other levers to support the purchase price. Stepped royalty payments and special rental arrangements are examples of how franchisors can help franchisees that would otherwise have difficulty financing their franchise acquisition. From a franchisee perspective the upside is they commence trading earlier in the system and often on favourable financial terms, however, significant downside risk can also be created through the additional powers now resting with the (lending) franchisor. A separate issue for franchisors is they could inadvertently position themselves as a NBFI (Non-Bank Financial Institution) which can create an enormous adverse impact on their risk profile with banks and create a possible breach in existing lending covenants.

Banks and other lenders:
For most prospective franchisees it will come as little surprise that the banks are still the most common and reliable source of franchise finance.

Less well known, and often hard to identify, is who the active lenders and strongest supporters of the franchise sector are. Franchisors, and the professional advisors of franchisees, have long lamented the inconsistent and dislocated approach of lenders in franchising. However, banks continue to be driven by a desire to lend money to borrowers with an acceptable risk profile and on the whole maintain a healthy appetite for franchise lending.

The risk profile for franchising can be enhanced by the historical information that can be provided or accessed. History can provide significant comfort (or anxiety) around how the future may look. Some of the key areas that lenders will look at include the existence of a proven business model, the trading performance of existing franchisees, the performance of their existing loan book, the capacity and willingness of franchisors to support ‘distressed’ franchisees and the depth of the secondary (resale market). Well-managed and strong franchise brands can offer a strong and attractive risk profile for banks. For franchisees this should translate to quicker, easier and more competitive finance terms.

The major Australian banks remain the most active in the franchise lending space with the ANZ, CBA, NAB and Westpac all maintaining dedicated franchise bankers and franchise lending policies albeit there are significant differences in their models and current activity levels.

Franchise lending activity and appetite is also apparent in regional lenders such as Bankwest, Suncorp and the Bank of Queensland and in recent times we have seen the emergence of specialised lending providers such as Silver Chef, Cashflow It and the new franchise lending fund CAPFAC.

Regardless of the lender, there are three key things that new or refinancing franchisees can do to simplify their search and increase their chances of accessing franchise finance.

1. Find a ‘franchise friendly’ bank: Look deeper than a bank’s broader small business messaging. While franchising is a big part of this group it is best looked at independently. Most banks claim to be actively involved in franchising but in reality there is some variance in how active their appetite is for the broader franchise sector. There are a few tricks for identifying ‘franchise friendly’ lenders. Firstly, identify individual bankers with direct contact numbers for franchising (rather than a central number).

These bankers are responsible for servicing the sector, will have generally had specialist training, be actively involved in the sector and better equipped to service your needs. Secondly, look for banks that are actively expanding their offering; employing more franchise lending staff, providing more franchise sponsorship and approving more franchise brand accreditations. These are all  good signs of their support for the sector.

Thirdly, ask the franchisor to connect you with recent franchisees into the system and ask them to share their recent franchise lending experience. If your first interaction with the bank does not leave you with confidence that the banker is familiar with your brand and has a clear understanding of required timelines then it is wise to immediately engage an alternate provider. Sometimes a reputable finance broker can be invaluable in this process. An added benefit, of course, is the potential to compare two or more offerings and select the most appropriate deal for you. A little competitive tension between lenders can be a good ingredient for securing the best deal.

2. Find a ‘lender friendly’ franchise brand: Ask your franchise brand who to talk to at each bank. (This will provide an immediate test of the strength of their banking relationships and an  indication of the effort they have put into becoming ‘lender friendly’).Banks lend more money and more easily to brands deemed to be ‘lender friendly’.

Through a lender’s eyes ‘lender friendly brands’ have:
• a desire to be clearly identified as a genuine and quality franchise brand;
• a clear ability to provide lender information in a timely and transparent manner;
• a commitment to operating under and respecting the Franchise Code of Conduct;
• a sound financial position (franchisor);
• a proven track record and skill at recruiting, training and supporting franchisees;
• an ability to provide insights into unit performance (franchisees);
• an ability to provide insights into the secondary market (unit resale values); and
• an ability to work constructively with lenders in the event that expectations are not being met.

Many well managed and strong franchise brands are broadening the number of lenders they deal with to safeguard against any reduced lender appetite from their one or two key existing relationships and restrictions that may arise from any internal wholesale lending limits (sometimes referred to as caps) that lenders may introduce.

Finally, and most importantly:

3. Put your best foot forward: No matter which lender you turn to they will be looking for well organised applicants and solid future business operators. A fully completed application form with copies of supporting documentation and a simple business plan will go a long way to creating a good first impression. Prepare yourself well with a good understanding of what information is required, how much you need to borrow, how you will pay it back and what your ‘fall back’ position will be if your business expectations are not met. In lender terms the ‘fall back’ position is what they think they can rely on if the repayments cannot be made. Whilst they will take on some risk they will always be looking to minimise this through either an acceptable cash contribution by the borrower, an acceptable level of equity in assets pledged as supporting security, comfort in the resale market for the franchise unit or the willingness of the franchisor to buy the unit back from a struggling franchisee.

Whilst not always straight forward, well researched franchisees and ‘lender friendly’ brands  continue to find ways to access and simplify the funding of new franchise units.

Darryn McAuliffe is the CEO of FRANdata Australia and has over thirty years’ experience in the banking and finance sector. He is a CPA and experienced former bank executive across business banking, risk management and industry specialisation. For four years prior to joining FRANdata  he ran the NAB’s franchising strategy which included the accreditation and portfolio management of major Australian franchise brands.

FRANdata has been supplying independent and credible information to support key franchise  decisions for more than twenty five years. Positioning brands for improved finance access is a core specialty. FRANdata operates the Australian Franchise Registry™.

P: 02 8346 6093