Set Up Shop
What you need to know to ‘set up shop’!
There are more than 1,100 franchise systems across Australia, contributing a staggering $128 billion to the Australian economy.
With over 70,000 individual franchise owners, employing over 700,000 people across the country, the franchise world is certainly big business.
In New Zealand, the franchise industry has experienced a rapid growth period. The Franchising New Zealand 2010 survey conducted by Massey University, Auckland and Griffith University, Queensland found 423 active franchise systems in New Zealand compared with an estimated 350 in 2003. The survey also estimated a total 23,600 franchisee units, which was a 92 per cent increase over the seven years. The franchising community is a major provider of employment opportunities in New Zealand, with total direct employment assessed as
New Zealand has twice the number of franchisors and almost twice the number of units per capita as Australia, making it the highest per capita franchised country in the world.
So, whether you’re in Australia or New Zealand, how do you become part of this exciting industry, and what are the steps you need to take before you join a franchise system? – or in other words – what do you need to do to set up shop?
Firstly, ask yourself “Is franchising right for me?”
Franchising is not a guaranteed path to success, but it is however a solid formula, based upon tried and tested systems, that can pave the way for the right franchisee to achieve success.
Joining a franchise is not for everyone; to be successful you must be willing to follow the system provided by the franchisor. If you don’t like to be managed, or prefer to do things your own way then perhaps you should reconsider your options.
Franchising works because it delivers goods or services in a consistent manner, regardless of location. If you want to do things your own way then franchising may not be suited to you.
BENEFITS OF FRANCHISING
• A proven system – By purchasing a franchise, you are buying a business with a track record of success and commercial viability. This is where research is vital; you need to ensure that the system you are buying into has continued to be profitable over time. Providing the system is followed, there is less risk of failure then with a start-up venture.
• Start up assistance – The franchisor will assist you with the physical fit out of your premises, or if it is a mobile or home-based business, then everything that will be required to begin operating your business within that system.
• Support – Ongoing assistance is provided by the franchisor. You will also benefit from the knowledge and experience of the franchisor. Being part of a network also allows you to share your experiences and learn from others in the network.
• Bulk purchasing power – Being part of a franchise gives you access to group buying power not available to individual businesses.
• Marketing – Through contribution to a marketing fund, franchisees gain the benefits of a larger marketing fund used to promote the whole network.
• Finance – Franchisors may be able to negotiate better rates of finance for funding the business, and/or better lease location and terms if there are premises involved.
RISKS OF FRANCHISING
• Reluctance to follow the system – If the franchisee cannot adhere to the discipline required to follow the system, conflict will occur.
• The process for sale or transfer of the franchise rights is likely to be controlled by the franchisor (as per the franchise agreement), though approval for sale or transfer cannot be unreasonably withheld.
• The behaviour of the franchisor or other franchisees can affect the brand integrity for other franchisees.
• If the franchisor goes into receivership, franchisees may face the prospect of having to change brand name and other elements of the system under a new operator.
• Franchisors’ ability to make changes to the system can affect cash flow and/or profitability for the franchisees.
Franchise businesses face the same challenges as other businesses. Economic downturn, increased competition, and many other risks affect franchises in the same way they do non-franchised businesses.
CHOOSING THE RIGHT FRANCHISE
Perhaps one of the greatest decisions you will need to make is choosing the right franchise for you. Remember that once you have entered into the agreement, you will be required to live and breathe the business for it to succeed!
Darryn McAuliffe, Industry Solutions Manager at NAB suggests there are some questions that you need to ask yourself when considering a franchise including;
• Do I have a passion for the brand and its product or concept?
• Am I motivated to work in this business for the next five to ten years?
• Do I see growth in the franchise? And can I acquire more outlets once established?
• Do I share the same vision, values and work ethic as the franchisor?
• Will I be happy to comply with the existing system without wanting to make changes?
If the answer to all of these questions is ‘yes’, then it is likely that the franchise you are considering is going to be the right one for you, and importantly your relationship with the franchisor will be a positive and mutually beneficial one.
By conducting thorough due diligence you increase your chances of making a good decision and of future success.
Due diligence is the process of evaluating the prospective business purchase by getting information about the financial, legal, operational and other important aspects of the business.
Kevin Bugeja of Franchise Selections advises that before investing in a particular franchise, it is important to research the operation as thoroughly as possible.
“Find out how long the franchise has been in existence,” says Kevin. “If the franchise has been in operation greater than ten years, it is more likely to have made it through several stages of growth; therefore having a more reliable system in place.”
Other questions that need to be answered, according to Darryn McAuliffe, include:
• How much will you need to invest to buy and operate?
• What initial and ongoing training will you receive?
• What level of support will you receive with managing your business?
• Does the franchise have the ability to remain competitive and maintain its brand value in a fast moving market?
It’s also recommended you read the Franchising Code of Conduct to understand your rights as a franchise and those of the franchisor. The Franchise Council of Australia has an abundance of information relating to the code as well as recent changes and reviews of these changes on their website www.franchise.org.au.
“Obtain firsthand information by speaking with other franchisees within the organisation to determine how the franchise has worked out for them,” says Kevin. “Find out if they have achieved the success that they expected.”
ASKING THE EXPERTS
Evaluating a prospective franchise business is not an easy process. “You will almost certainly need professional help to carry out due diligence,” says Tim Kilham, Director of Accounting at Lanyon Partners.
These professional advisors usually include an accountant, a solicitor and a banker.
“It is advised that you consult with a professional advisor who is a specialist in the area of franchising,” says Tim. “In the medical field, general practitioners do a great job but there are times when you need the services of a specialist. So it is with franchising. Most accountants, solicitors and bankers do a great job, but franchising occupies a special niche, with its own legislation and circumstances, and it requires the services of specialists to carry out proper due diligence.”
According to Tim, the roles of your professional advisors are;
• An accountant will help you evaluate the existing business and establish its true sustainable profitability (which may be, and very often is, very different to the profit shown in the financial statements). An accountant will help you prepare your business plan and your profit and loss and cash flow forecasts and help you work out a fair price to pay for the business.
• A solicitor will help you understand all the legal documents – the disclosure document, the franchise agreement, the lease, the sale contract, etc., etc. – and provide advice on these documents.
• A banker will advise whether the finance will be forthcoming and if so what types of finance are available and appropriate.
Whilst a banker’s role is not generally that of providing advice about the potential purchase, a specialist franchise banker’s perspective is nonetheless often very useful.
FINANCING YOUR FRANCHISE
In this edition of Business Franchise Australia and New Zealand, Jason Gehrke of the Franchise Academy discusses in more depth the options available for financing your franchise. See page 52.
Darryn McAuliffe recommends the following when approaching a bank to obtain funding for your franchise.
• demonstrate that due diligence has been undertaken
• develop a comprehensive, professionally presented business plan
• provide all requested information in a concise and professional manner – missing details will cause more challenges for you in obtaining what is required
THE DISCLOSURE DOCUMENT AND FRANCHISE AGREEMENT
With your due diligence and financing covered, the next step will be to navigate the franchise documents. Marianne Marchesi of Mason Sier Turnbull covers these documents in greater depth on page 24.
If you are considering buying a franchise you will be provided with the current version of the franchisor’s disclosure document which will be attached to the form of franchise agreement you will be entering into and a copy of the Franchising Code of Conduct.
Elisabeth Richie, Partner at HWL Ebsworth Lawyers, outlines the documents provided prior to entry into the franchise agreement:
Franchisors must ensure that they disclose in the disclosure document the information which is necessary to enable you to make a reasonably informed decision.
The franchise agreement attached to the disclosure document should be in its final form. This means that the schedule of the franchise agreement must be completed with all the commercial details specific to your franchised business and the agreement must be the current version used by the franchisor. You will need to have decided on your franchisee entity (whether yourself, a company, trust or partnership) as disclosure needs to be made to the franchisee entity in order to comply with the Code.
Lease or Licence to Occupy
For those franchises that are retail based, the premises for the business is central to its success. Usually, either the franchisor will hold the lease and grant to the franchisee a licence to occupy the premises or it will elect to not hold the lease and the franchisee will be the lessee. Depending on the type and nature of the particular franchise system, the franchisor may or may not have an active role in negotiating the lease.
If the franchisor holds the lease then you will be provided with a copy of the lease, licence to occupy and in some states, a lease disclosure statement.
In both cases it is important to ensure that you have sufficient tenure on the lease to operate the franchise as the franchise agreement will usually end on the termination or expiration of lease (unless there is a relocation clause).
Elisabeth advises that you should carefully read all of the franchise documents provided by the franchisor and seek legal advice to ensure that you understand their force and effect. In some cases you may be able to negotiate clauses or special conditions to reflect your negotiated deal with the franchisor or to further protect you.
Once the franchisor has served the disclosure documentation on the franchisee, the parties need to wait 14 days before entering into the franchise agreement. This disclosure period is mandated by the Code in order to give you sufficient time to contemplate your purchase
and to get advice in relation to the terms.
WELCOME TO FRANCHISING!
Once you have entered into the franchise agreement, your journey in franchising truly begins and your franchisor will be there with you every step of the way. As with any business, there will be ups and downs, but with the research you have done, coupled with the knowledge that you are entering into franchise system that has proven to be successful in the past, you have been given every chance to succeed.
Now the hard work really begins!
Information obtained for this article from the Australia and New Zealand Business Franchise Guide available in book shops and online.