Franchises In Your Price Range
One of the questions that we get asked all the time at Business Franchise magazine, by people researching the purchase of a franchise, is: “Which one would you buy?”. But surely the first question the potential franchisee should be asking is: “Which one can I afford?”
Over the many years that Business Franchise Magazine has been involved in franchising in Australia and New Zealand, we have dealt with hundreds of different franchise systems on a regular basis.
From the newest up-and-coming ‘must-have’ to the ‘old-timers’ established and successful over many years, franchising has never been so diverse. So, where do you start?
If you are lucky enough to know the industry you wish to join, the answer to this will help you decide which franchise systems to approach. If you have no idea of the industry type you wish to buy into, this is a helpful exercise as it will help to narrow down the wide range of 1600+ franchise systems available in Australia and New Zealand.
So what is your price range?
Business Franchise Magazine is always packed full of current franchise systems available, all categorised by price bracket to give you some helpful information on where to start. Head to pages 88 & 89 of our latest issue (March/April 2019) for a list of more great franchise systems.
Can I Afford a Franchise?
Are you looking to buy a franchise but aren’t sure you can handle the costs involved? It’s true, an average middle-class salary alone probably won’t be enough to make your dream a reality, but that doesn’t mean starting a franchise is impossible even on a limited budget. You just must know where to find the assistance you need.
Franchise Start-up Costs
Start-up costs vary widely and can range from as low as $10,000 to more than $1,000,000. A big factor is whether or not it will be necessary to own or lease real estate for your business.
What Can You Afford?
In order to determine what you can afford to invest in a new business, you need to have a good understanding of your current finances. You can start figuring your net worth by compiling a balance sheet that lists all assets and liabilities. Some franchise experts believe you should not invest more than 15% of your own money, but this percentage may vary. Seeking the consult of a financial advisor is wise because they can help you determine how much of your own money you can afford to invest based on your specific financial situation.
Unless you are interested in a low-cost franchise, you will likely need to borrow the majority of the funds to purchase your business. In general, lenders require you to provide 20–25% of the total investment. For example, if you have $50,000 to invest, you will want to research franchise opportunities in the $200,000 range. Before approaching any lender make sure you are current on all bills, correct any mistakes on your credit report, and be prepared to explain any blemishes.
Why buy a franchise?
Wanting to trade under an established brand commonly motivates franchisees purchasing an existing franchise. However, franchising can be a costly business venture, and before jumping straight in, it is important to consider the costs and financial obligations involved in franchising. Below, we look at the financial aspects from the perspective of a franchisee to help you answer the question, ‘can I afford it?’.
At the outset, franchisees should carefully examine the franchise documents to determine all the costs involved. In particular, you should carefully read and understand the disclosure document because, as required by the Franchising Code of Conduct, franchisors are required to disclose all actual or potential associated costs of the franchise business, including the initial franchise fees and costs through to the ongoing fees or royalties. The document should detail costs including upfront documentation fees and day-to-day operational expenses, such as postage costs and staff amenities.
The fees that a franchisee must pay may be quite costly depending on the length of the contract and the perceived reputation of the franchise. Franchisees should be particularly aware of:
1. Initial Franchise Fees
Initial franchise fees are meant to cover the cost of initial assistance needed in setting up the business such as recruitment, obtaining a lease and/or licence, fit-outs assistance and any training involved in running the franchise business. Initial fees will typically rise in relation to the length of the franchise contract as well as the brand’s reputation.
2. Ongoing fees
Once the business is set-up and operating, franchisees will also be responsible for paying an ongoing franchise fee. This usually based on a percentage of the franchisee’s gross revenue and determined by the division of obligations and responsibilities between the franchisee and franchisor. So remember that a greater reliance on the franchisor for support may be reflected in a higher percentage of ongoing fees.
3. Other Costs
Franchisees should also be aware of other aspects involved in setting up a franchise, such as the business structure, which may influence their financial obligations. Additionally, franchisees should consider buyer costs and the costs of setting up company trusts.
The key for a franchisee is always to plan. Analyse the franchise documents and use the information to prepare cash flow forecasts and business plans. It is also worthwhile to do your research. While disclosure documents itemise the costs and expenses for which you are liable, they rarely give an indication of the income you will derive against which those costs will be offset. Examining the industry, talking to other franchisees and undertaking some market analysis will be critical in determining the overall financial risk you will take on.
As the franchisee, it is important that you understand your financial obligations and business structure. If you have any questions, let a franchise lawyer know.
Buying a Franchise: FCA guidelines
In Australia today there is a franchise operating in almost every type of business category, with varying levels of complexity and cost. Prior to buying a franchise, potential franchisees should do the following;
1. Assess your own reasons for wanting to own a business;
2. Assess the lifestyle and income implications of owning and operating a business;
3. Assess the franchise opportunities consistent with 1 and 2 above.
4. Build your understanding of the franchise relationship by reading the Franchise Guide.
5. Narrow your franchise search to a few systems, then request further information.
6. If appropriate, and you are comfortable with the decision, select a system and commence the application process.
7. Ensure you have adequate borrowing capacity, including working capital, to successfully establish this type of business.
8. Be sure you receive and evaluate all disclosure material during the application process.
9. Be sure you receive legal and accounting advice from lawyers and accountants with franchise experience before making any final commitment.
10. Use the cooling-off period to check your facts and figures and determine if you still want to proceed.
This is by no means an exhaustive list of things you should consider prior to buying a franchise, but if you work through these 10 steps you will be at less risk of rushing headlong into a hasty and ill-informed decision.
If you are curious about franchising, The Franchise Council research facilities can help supply the answers you need. Head to www.franchise.org.au for documents that will provide you with an overview of the things you need to consider as you embark on your research.
Due diligence before entering into a franchise agreement is essential. The resources found at www.franchise.org.au will help you identify the next steps in your research.
Business Franchise Magazine also produces two annual publications offering advice from various professional advisers. You can order the latest issues via http://www.businessfranchiseaustralia.com.au/annual- publications. The directory is cross-referenced by category and includes an alphabetical index, so finding a particular franchise or type of business is quick and easy via direct links or email. Our website https://www.businessfranchiseaustralia.com.au/ has a comprehensive web-based Directory of many franchise systems in Australia. You can also find various professional advisers for assistance in purchasing a franchise.
Franchise Costs & Fees
In all business format or package franchise programs, franchisors directly or indirectly collect payments from franchisees for the right to use their brand and to participate in their systems. Franchise fees can range in price (for up-front franchise fees and set-up) from as little as $5,000 to as much as $1 million, or more. Typically, franchisees are also required to pay ongoing fees for franchise support, which may be a fixed monthly amount, or calculated as a percentage of turnover.
Fixed monthly amounts may range from $50 per month up, while percentage fees may range from 2% to as much as 15%. Additionally, a further fixed or percentage of turnover fee may be applied to cover the costs of group marketing.
It is always essential that anyone considering becoming a franchisee receives competent professional advice from qualified and experienced advisors. The FCA can direct potential franchisees to accountants and lawyers who are members of the Council
and who understand franchising, which is a specialist field of practice. Business Franchise Magazine boasts a large range of Expert Advice articles from a number of leading industry experts in accounting, legal and much more.
Deal only with FCA members
Members of the Franchise Council have committed to following the mandatory Franchising Code of Conduct, plus any FCA designated member Code of Conduct. This, in addition to common law rights, increases protection for franchisees from unscrupulous operators. All intending franchisees should ensure that they deal only with members of the Franchise Council of Australia and ask for proof of an organisation’s membership of the FCA.
Type of business
The position of the franchise in the market in which it trades is a vital consideration. You should not only look at the particular franchised business in relation to its own activities, but also make an assessment of the prospects for the overall industry or trade of which it forms a part. The franchise will either be dealing in goods or products, or the provision of services. The accompanying table contains a comparison of the various considerations which should help in making an assessment.
Are you cut out for it?
Despite the benefits, franchising is not for everyone, and it can be surprisingly competitive just to be selected as a franchise. Good franchisors are highly protective of the brand they have built up and, not surprisingly, many actively seek out people who will be enthusiastic brand ambassadors. Even if you have the right personal qualities, you need to commit to playing a very hands-on role in the business and that inevitably means long hours at the coal face. Investing in a franchise gives small enterprises the benefit of a well-known brand, something that can take years for an independent venture to build up, as well as the proven business systems of the franchisor.
According to Dominique Lamb, CEO of the National Retail Association (NRA), 80% of independent small businesses fail in the first five years – “that’s far higher than the 20% failure rate among franchisees”. The advantages of franchising go beyond an established brand. “As a franchisee you’re not entering a new industry on your own,” says Lamb.
“You have the support of the franchisor, and this can extend to assistance with human resources, organising business bank accounts, which can mean securing discounts on equipment like EFTPOS machines. Franchisors will also often step in to negotiate leases for franchisees or at the least educate franchisees on how to negotiate a commercial lease.”
“Be prepared for hard work,” cautions Lamb. “A franchise is not a way to make money without you being involved. You have to drive the business, make your mark on it and lead by example, especially when it comes to motivating staff to give their best effort.”
Enjoy this issue of Business Franchise Magazine’s feature – Franchises in your Price Range!