The Strengths of Franchising in Tough Times

This article appeared in Issue 3#3 (March/April 2009) of Business Franchise Australia & New Zealand

The global economic downturn is clearly a major hurdle for all businesses and franchising is no exception. However research indicates the industry will continue to grow this year. According to an IBISWorld Industry report (Sept 08) the sector will generate revenue in 2008-09 of $170 billion, which will be an increase of 5.2% compared to 2007-08.

Even so, in tough economic times it is important to harness the strengths of the franchising model. While nothing in life is guaranteed, using the advantages of the franchising system can provide a very efficient business model.

Top five advantages

So what are the advantages?

To start with there is the strength of the franchising brand, or brand recognition. This is particularly important because it can be a powerful tool in negotiating with landlords and suppliers. For example, a franchisee may find when dealing with landlords being part of a franchise means they have more control than they would have if they were simply operating a stand-alone business. Often landlords of shopping malls consider franchised businesses desirable and even required tenants. From a landlord’s perspective, having the brands that franchises deliver in their centres is an advantage in attracting consumers and therefore other tenants.

Another advantage for prospective franchisees is the experiences of others who have gone before. Often franchisees in other areas have tried the strategies a would-be franchisee is considering, in other words they have “been there and done that” although not necessarily in the local market.

Top five advantages:

1. brand recognition
2. negotiating muscle
3. other franchisees experience
4. training, coaching and development
5. codes of conduct

This raises another important point. Prospective franchisees must study the market closely to make sure the business they are planning will work in the geographical area they are considering.

In the current economic conditions, the strategies other franchisees are adopting to get through the current downturn in the business cycle offer invaluable insight too.

Prospective buyers should investigate the track record of the franchisor including the number of stores, the number of years it has been in operation and what the franchisor’s future plans are. The franchisor’s growth strategy will give potential buyers insight into the number of new stores planned and the proposed locations, which could obviously impact the bottom line of individual stores within the system.

Training, support and preferred supplier arrangements are also benefits of franchising

The franchisor should have a detailed training course for first time franchisees, and in many cases for store managers and staff. Compare the training outlined against other franchise systems to ensure you are getting value for money. The training should also be industry appropriate as this will be the most effective training to prepare you for success in your business.

In terms of support, utilising all the resources available across the network and within the wider local business community is fundamental to success. Franchise systems have area managers employed to coach and assist a cluster of franchisees, generally in a close geographic spread, to reach maximum revenue and remain compliant across the network.

Proper engagement of these resources is invaluable when starting out. In addition, the system’s Franchise Advisory Council – an internally focused group within the franchise system – is often a good means of establishing and maintaining communication between franchisees, allowing them to exchange ideas and experiences about dealing with what can be common issues.

Once a franchisee joins a franchise they basically join a big network, like a spider-web of support. The support is valuable and can help a franchisee to feel far less isolated than if they are operating a single business on their own.

There is also a Franchising Code of Conduct, which covers disclosure. This Code was introduced in 1998 and is administered by the ACCC, and it has recently been modified to provide greater disclosure to prospective franchisees. It was set up to try to ensure franchisees are fully informed of important information when starting their businesses. The aim is to cut down on, or if necessary resolve as quickly and inexpensively as possible, any disputes between franchisee and franchisor. As part of the Code, a franchisee must seek independent legal advice from a lawyer, accountant or qualified business advisor to make sure they understand the franchisor’s business system.

Looking beyond the downturn

Prospective franchisees are often drawn to the franchising business model not only for the robust framework that it offers, but also because of the large range of franchising sectors to choose from. It’s worth considering that while disposable income is a major factor for all businesses, there are other factors at play in choosing a suitable franchise.

The golden rule is that a prospective franchisee should always make sure the franchise business they are considering will fit with the lifestyle they are prepared to undertake, the personal and business values and principles they hold, and clearly provides the financial returns that reflect a fair return on investment.

In addition, it is worth considering how trends are impacting on the franchising industry as a whole. One good example of this is the increasing demand for healthy eating options. Franchises that have tapped into the health market have done well in recent times.

The IBISWorld Industry Report highlights other factors influencing franchising as a lack of leisure time, boosting demand for personal and service franchises and a change in demographics as behind an increase in education service franchises.

Hence in times like this, it is necessary to look beyond the current situation and try to see the bigger picture. What is going on that may influence the demand for the franchise business you are considering?

Expert advice

Overall our fundamental advice to prospective franchisees is to research, research, research. Read the reports available, attend information seminars, ask the hard questions of the franchisor. Franchisees need not be experts in every aspect of the business – rather, they should have a good general overview of how the business operates and then know when to consult experts such as lawyers, accountants and specialist franchising bankers for assistance. Do your due diligence and all this will help you put together a robust business plan.

Where to start?

When considering a franchise business, obtain the marketing data that they have to offer. However look for independent information. DC Strategy has launched a new initiative that provides the opportunity for prospective franchisees to purchase independent franchise business reports containing independent information on individual franchise systems. Visit www.dcsreport.com to see if a report has been commissioned. As mentioned earlier, existing franchisees are also good resources, as are service providers such as accountants, bankers and lawyers who specialise in franchising.

The Commonwealth Bank has a dedicated team of franchising specialists who can assist prospective franchisees in financially managing their purchase decision. To speak with a franchising specialist from the Bank, call Rod Nuttall on 0420 946 013.