Franchising vs. Licensing – Which is right for you?

Ty Menzies | National Sales Manager | 9Round Australia

T, MenziesA career as a PT can present more opportunities than just training clients, with many of the major Australian fitness brands opening their doors to owner operators through franchising and licensing arrangements.

While the prospect of becoming a Franchisee or Licensee may be daunting, it can be an exciting and potentially prosperous endeavour when pursued in the right way. There are several benefits and disadvantages that need to be weighed up before entering into any kind of business agreement.

We asked 9Round Australia National Sales Manager, Ty Menzies to share his key insights into the two business models.

FRANCHISING

The franchising model is heavily adopted in the fitness industry, as it enables franchisees to have access to a well-known brand and reputation with support from the franchisor to guide them every step of the way. Some of the notable brands who utilise this model in Australia include Snap Fitness, 9Round, Anytime Fitness, Jetts and Genesis Fitness.

The Pros

1. Offers a set and exclusive territory to operate your business within.

This one is likely to vary based on the specific franchise contract, but the majority of franchises do grant exclusive territory to their franchisees. This enables the franchisee to have a set geographic area which they can market to, without threat from another franchisee.

2. The independence of being a business owner with the support of a large successful organisation.

Franchisees are provided with significant corporate support from the franchisor, which includes tried and tested systems and suppliers that they can lean on in getting the franchise up and running. This support really helps in the early stages. Franchisees can enjoy this security, while still having a feeling of independence from owning their own business.

As well as this, the franchise model gives you access to a well-known brand and reputation, which typically means less time and resources will be required for marketing.

3. Minimal experience is required and significant training is usually offered to new franchisees.

You don’t necessarily require business experience to own a franchise (although it definitely helps). The franchisor will usually provide you with the training necessary to operate the business.

4. Finance can often be easier to secure due to proven track record.

If the franchise is well known with a proven track record and a good degree of accuracy in sales projections, there will be a lower perception of risk which will assist with financing. Significant research is still required by the franchisee before making an investment.

5. Franchises have a higher rate of success than independent small businesses.

Depending on the strength of the brand and guidance of the franchisor, opening a franchise will typically create a more impactful impression when first establishing your presence in a local market.

The Cons

1. Lack of flexibility in running the business the way you want.

As the franchisee you are bound by your franchise manual and the actions of the franchisor. So if the franchisor decides to introduce new products, branding or pricing – you are obliged to follow suit. This often also relates to site location and fitout.

2. Poor performance or actions from other franchisees can negatively affect your business.

As the reputation for your business’s brand is in the hands of a number of franchisees, the franchisor must enforce compliance standards across the whole network to avoid the actions of one franchisee negatively impacting the business of all.

3. You must comply with all of the franchisors rules and regulations for operating the business.

It’s important to remember that when it comes to franchising, you are in business for yourself but not by yourself, so you will still be required to follow direction from the franchisor.

4. You will be required to pay an ongoing fee or percentage of turnover to the franchisor.

As well as paying to join a franchise group, franchisees are required to pay an ongoing fee on a periodic basis for the life of the business.

5. When selling your business the franchisor has the right to refuse any potential buyer if they are not a good fit for the brand.

Although this may delay the process, the franchisor does have the right to be selective about their franchisees to ensure the long-term integrity of the brand.

LICENSING

The licensing model is again very common in the fitness industry as the IP of fitness training is unrestricted, creating an opportunity for the licensee to develop a point of difference whilst operating under a branded license agreement. Some of Australia’s most well-known fitness brands that adopt this business model include; World Gym Australia, F45 Training and CrossFit.

The Pros

1. Licensing often allows you to be more flexible in the delivery of the product or service.

Typically, licensing has fewer barriers to entry with the licensor retaining little to no control over how the licensee choses to operate the business. This leaves the licensee with significant flexibility to make their own business decisions.

2. Typically the upfront and ongoing fees with licensing are lower.

After the initial purchase of a licensing agreement, there is often very low to no further financial obligation between the licensor and licensee.

3. Often a licensed product or service can be sold alongside other products and services you might have.

As part of the flexibility and control of a licensee, they are often able to sell their own products alongside the branded ones of a licensor.

4. Licensing offers faster growth potential in the beginning.

As licensing requires very little capital outlay, it should provide faster growth and a high rate of return on the initial capital invested.

5. Much easier to on-sell a license agreement onto someone else.

As the licensor has lessened control over the individual licensees, you can sell a license agreement onto someone else without the considerations required when selling a franchise.

The Cons

1. No set and exclusive territory to operate your business.

Often licenses are sold with no set exclusive territory between each other and can be sold to competing businesses, depending on the style of license.

2. Often minimal training and ongoing support is supplied to the licensee.

With minimal training and support provided by the licensor, prior business experience and an understanding of business practices is a must. Especially as product development, inventory management and store replenishment are usually the responsibilities of the licensee.

3. Licensees are not protected by a governing body.

Where franchisors are regulated by the ACCC, there is no governing body to regulate licensing in Australia.

4. There is less credibility with licensed models and it can be more difficult to secure finance.

Having an established and proven business model to present to the creditor will allow for a far smoother process when looking to secure finance. When a franchise grows to more than 20 they can apply to their main banking institution to become a lender of choice allowing for an even easier access to finance for the franchisee. This option often isn’t available for licensees.

5. Licensing a product or service can be more expensive for the licensor.

By licensing you lose out on the buying power that comes with franchising purchase deals. You will likely also pay premium for the most part when it comes to the supply of stock as this is controlled in a franchise setting and is continuously reviewed by purchasing experts.

Fitness InstructorWhen it comes to choosing the right investment model, there’s no one size fits all approach as Ty’s comments demonstrate. Ultimately it comes down to personal choice and previous experience.

Those who have run their own business before may find more freedom and room to be innovative by operating under a licensing agreement, as those same people would likely become frustrated under the brand or operations control of franchising.

If you’re looking for training, support, structured and measurable marketing, purchasing power and brand power then franchising is likely a more ideal business model for you. Before investing, however, make sure you do your homework to ensure that the business is viable long term and that ROI can be reached in a reasonable timeframe (generally between 1 - 3 years).

Asking all the right questions of your franchisor and of their franchisees to ensure you are comfortable making the investment and finding out what an exit strategy looks like is extremely important. Above all else, the business you are looking to invest in must be something you are passionate about and can see yourself being a part of for the long term.

Starting his fitness career as a personal trainer in Melbourne, Ty Menzies moved quickly into roles within sales and club management before opening his first of four health clubs at the age of 22. After selling and moving to Queensland, Ty completed an MBA before stepping back into the industry as the National Sales Manager for Lift Brands Australia.

Lift Brands is the world’s largest franchised wellness company occupying more than 3000 facilities across the globe, and with its latest addition - 9Round taking the industry by storm they are continuing to grow here in Australia, with 100 9Round clubs planned to open across Australia in the next 3 years.

www.9round.com.au