Avoid the pitfalls and make franchising a great opportunity for you

Small Business Commissioner David Eaton

Avoid the pitfalls and make franchising a great opportunity for you

Franchising can be an excellent way to ‘be your own boss’, but it’s not a guaranteed recipe for success.

The advisory team at the Small Business Development Corporation (SBDC) works with small business franchisees as well as business owners who wish to become franchisors. Franchising is an exciting concept that has proved to be very popular in Australia.

As a business model, franchising allows a business to operate under the established brands, systems and procedures of another business and sell its products and services for a specified time period, for a fee.

In the 1980’s franchising flourished in Australia with international organisations such as McDonalds, Kentucky Fried Chicken and Pizza Hut leading the way. Since then, Australians have embraced the franchising model and many Australian-owned franchises are now successfully operating here and overseas.

There are more franchise systems per capita in Australia than in any other country with approximately 1,200 franchise brands covering more than 79,000 franchise units and employing more than 460,000 people.

According to the Franchise Council of Australia, 86 per cent of the most successful franchises in Australia are home-grown, and the sector is reported to be worth more than $146 billion to the Australian economy.

The advantages of buying a franchise include having the independence of being a business owner but with the benefit of support from an established business network and brand.

Franchising your own business can also be an opportunity to open ‘branches’ of your business around the world with more of a hands-off approach than if operating the outlets yourself. Carefully detailed systems and processes need to be in place to franchise your business. You will need the assistance of lawyers and accountants to set up your franchise plan and ensure it complies with the Franchising Code of Conduct.

SBDC Chief Executive Officer, David Eaton, says potential franchise buyers should also engage a lawyer or accountant as part of their due diligence to ensure they know exactly what they’re signing up for when purchasing a franchise.

“The Franchising Code of Conduct, most recently updated in 2015, sets the groundwork for fair dealings between franchisors and franchisees but the onus is still on both parties to be willing and able to meet their obligations under the franchise agreement and the code of conduct.

“The code includes an obligation for parties to act in good faith in their dealings with one another and for franchisors to provide prospective franchisees with information on the risks and rewards of franchising.

“The code also provides for court ordered fines and penalties in the case of breaches.

“Whether you’re starting a business from scratch or buying a franchise, you must research thoroughly before investing any money.

“With a franchise, the cost is not only the upfront purchase price but the ongoing costs of running the business, including royalties, percentage of sales payments and, in many cases, being required to purchase supplies through the franchisor or related entity.

“Another important element of due diligence is talking to as many past and present franchisees as possible, and checking what customers are saying about them in online reviews,” Mr Eaton said.

Avoiding business disputes

Disputes can be crippling to any business, so having the opportunity to resolve disputes quickly and inexpensively, without the need to go to court, is often a life-saver for businesses in trouble.

The SBDC provides a dispute resolution service for business to business disputes, including between franchisees and franchisors. Mr Eaton says the SBDC dispute resolution team works with both parties to find a mutually acceptable solution to the dispute. Current results show more than 80 per cent of business disputes raised with the SBDC, are finalised without the need for formal mediation or court proceedings.

Leon decided to buy his local café franchise when the owner was looking to sell. Leon paid a $10,000 deposit to a business broker and started discussions. He then gave the franchise agreement and the café’s lease agreement to his lawyer and accountant to review.

The lawyer advised against signing the lease agreement, as it contravened provisions of the Commercial Tenancy (Retail Shops) Agreements Act 1985 (WA) which applied to the café. The accountant advised that he had been unable to obtain full details of the franchisor’s financial position, as required by the Franchising Code of Conduct.

Leon decided not to proceed with the purchase of the café based on the advice from his accountant and lawyer, but the broker refused to return the $10,000 deposit.

Through its dispute resolution service, the SBDC assisted Leon to negotiate with the broker and his deposit was returned.

Supporting your own idea or someone else’s?

Starting your own business requires a good idea of your own. As the owner of the business, you also have sole responsibility for choosing the business model, registering the business, leasing or purchasing commercial premises (if required), designing marketing material, implementing a marketing strategy and employing and training staff. In short, you make all the decisions concerning your business and you are therefore solely responsible for the success or failure of the business.

Buying a franchise means taking on someone else’s business idea, adopting their business model and working to their business plan. Being a franchisee often means meeting the franchisor’s business targets and following the franchisor’s marketing strategy.

Franchisors may also be involved with site selection and shop fitting, outlet design and equipment purchasing, market research, advertising and merchandising, and/or securing finance.

If you haven’t run a business before and have limited business experience, this involvement may be very welcome, but depending on the conditions of the individual franchise agreement and your own personality, you may feel restricted by the established business model and the limited opportunity to operate outside set boundaries.

In purchasing any business, it is imperative to check that the figures being offered are realistic and achievable. Most franchisors are honest and genuine in their dealings with franchisees, but some are not.

Sophie was a hairdresser who had been told about a mobile hairdressing franchise. She met the representative who provided her with a copy of the franchise agreement, a disclosure document and some information about the average earnings for the franchisees. Sophie’s brother told her to read the disclosure document carefully and contact some past and present franchisees to talk about their experiences working with the franchisor, and to verify the earnings information.

Too excited about the prospect of working for herself, Sophie signed the documentation, without speaking to other franchisees or checking the earnings.

Two weeks into her new business, she realised her profitability was limited as she had to buy all shampoo, conditioner and colour from her franchisor at his prescribed prices (more expensive than her usual supplier) and she couldn’t charge more than his price list for her services.She also discovered that ten former franchisees had reported the franchisor to the Australian Competition and Consumer Commission for his misleading behaviour.

Try before you buy

Small Business
David Eaton

Knowing what’s involved with franchising before deciding which franchise to buy, or whether the model is right for you, is a sound course of action.

For current and potential business owners in Western Australia, the SBDC can provide free, independent and confidential advice and guidance on all aspects of buying, starting and running a franchise or other small business. Call 13 12 49 or visit: www.smallbusiness.wa.gov.au.

The Griffith University Asia-Pacific Centre for Franchising Excellence offers a range of free online courses on choosing and evaluating franchises: