Dealing with emerging franchise systems

There is a view that sometimes new is better than old, but is that true when looking at emerging or mature franchise networks? The Griffith University’s Franchising Australia 2012 survey has shown that Australia is developing three new franchise systems every two weeks.

With over 1180 systems, it’s no wonder that franchising in Australia and the world is becoming more and more competitive as each system is working harder to compete for each dollar spent by your everyday consumer. More importantly, mature franchise networks must continue to evolve and be in touch with its market to remain competitive with the emerging networks. The emerging systems are invigorating the sector by introducing new and exciting products and services and meeting consumer demands not only dictated by technology but the ever growing global market.

Franchisees have and continue to experience enormous success across the globe and it would not have been but for brands such as McDonald’s, Pizza Hut, Subway, 7-Eleven, Australia Post, Dymocks and many more which have over many years proven their ability to evolve and keep up with the pace required by todays’ consumer. In addition, the importance of having emerging systems allows the sector to further thrive and to keep other systems honest. Some of these brands have changed the Australian climate in franchising, which have included brands such as Gloria Jean’s, Boost Juice Bars, Anytime Fitness, Sign-A-Rama, Snap-on Tools and many more.

There is no doubt that there is a risk to take, what may appear to be a safer bet is with a mature/established system. The fact is there is risk in both scenarios, but if it were not for the risk takers in the words of Neil Armstrong “there can be no great accomplishment” and each of the brands noted above and many more have in fact taken such risks.

DUE DILIGENCE

Whether it’s an emerging system or mature/established system, your due diligence should not be any different. At law, both systems are required to comply with the Franchising Code of Conduct (Code). The Code does not discriminate between both and was established to ensure that prospective franchisees receive enough information from the system to allow the franchisee to make an informed decision. This includes:

• The requirement to provide a Disclosure Document, which must include information relating to the system, its’ officeholders, the intellectual property offered and protected, the establishment costs associated with the business, financial information of the franchisor and the obligations of the respective parties;

• Cooling-off period – The franchisee has seven days from signing a franchise agreement or making any payment under the agreement to terminate the agreement without penalty except for reasonable costs of the franchisor;

• Dispute Resolution procedure – a strict process must be adopted by the parties during a dispute; and

• A franchise agreement that complies with the Code.

The above are fundamental requirements and must be adhered to by either an emerging or mature/established franchise system.

The success of a franchise system is based on good and responsible franchising. This means that the franchisor has proven its concept or idea and systems, developed the required documents to allow a franchisee the best opportunity for success including legal documents and manuals, a developed support program and an ability to provide sufficient marketing.

GETTING INVOLVED EARLY

Although some would say that a history of operating is critical, we should not forget that all systems originally started out with no franchisees and there are without question some real benefits in getting involved early. If done well, franchisees can excel in their business and in some cases become franchisors themselves, having learnt many lessons along the journey and willing to offer a new experience to those willing to try.

Don’t let failure of franchisees in a system be a deal-breaker. Failure is normal, even in franchising. It is estimated that less than 20 per cent of franchisees were involved in a franchise dispute with the franchisor in the past 15 months, many of which had not proceeded to any form of court action.

Anyone who expects that by joining a franchise system they eliminate the risk of failure is being unrealistic. There is a lot to be learned from examining the lessons behind a franchisee’s failure in a network.

Clearly, in a mature/established network, franchisee failure may go unnoticed however in an emerging system, failure may prove to be paralysing. Understanding the franchisors’ ability to deal with such circumstances is very important as it is inevitable and must be mitigated.

Franchising is not the strategy for every company and I have personally seen many companies that chose to franchise, now wish they had not. Your due diligence in any system is critical and when it comes to an emerging system, consider the team they have supporting them, including their advisors, the investment they have made in the systems and documentation, their ability to deal with tough situations (being a dispute with a landlord or franchisee), their strengths in marketing their brand and the network and most importantly proven ability to ensure a good return on investment.

There is ample evidence to suggest that an emerging system requires time to fine tune its system, processes and head office support. As the network grows, employing the right field support, creating stronger supplier arrangements, in turn increasing its buying power, enhancing its marketing and creating economies of scale and efficiencies are all challenges faced by mature/established systems but more so by emerging systems. Accordingly, a franchisee must be prepared that if it chooses to go ‘new’ then it must be cognizant and accepting of the challenges. More importantly, it should also be looking to supporting the networks’ growth to ensure the success of the overall system including its franchisees.

Marwan Kojok is the Managing Partner and Founder of Baybridge Lawyers and a leading authority on franchise related matters. They are seen as trusted advisors to many brands nationally and internationally.

Phone: 02 9232 3511
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