Guide to Franchising in Australia

Guide to Franchising in Australia & NZ

Over the past month I have been looking at Franchising in some detail for my business. For first timers to franchising I found that there is no clear guide in Australia and NZ for those wanting to go down the franchising path.

So I took the plunge and went to Melbourne to attend the Franchising Expo. Here I learned that this is a difference in franchising, dependant upon whether you want to be a franchisor or want to buy a franchise. This hub will provide a checklist for people who want to look at franchising in some more detail, whether you are starting a franchise or developing a franchise system.

First Steps

Regardless of your objectives you need to do some research on what is franchising and the best type of system for you or your business. Some materials that can help include:

  1. Read the Franchising Guide 5th Edition – this book gives a good outline of franchising and lists a number of systems, the cost to join, their penetration and turnover
  2. Read Top Franchise CEO’s Secrets Revealed by Darren Stephens to get a deeper understanding of franchising
  3. Read the Franchisee Manual distributed by the ACCC
  4. Sign up for the free Franchise Education Program delivered by Griffiths University

With this background if you think that franchising is still for you, then you can move into either the Franchisor or Franchisee Steps.

Franchisee Step

So you have decided that franchising is for you, the next step is to find a system that fits your value system, culture, is able to be profitable and is something that you can do and are interested in.

The ACCC recommends that potential franchisees ask these questions:

· Read and understand the Franchising code of conduct

· Understand your rights that include that you have a 6 month notice of renewal or non renewal, you need to have recieved a franchising code, agreement (final), copy of the code at least 14 days before signing Disclosure document:

· You can request a new disclosure document every 12 months

· Talk to past & current franchisees and ask them if they earning a return, are there any disputes, what training & support have they received?

If you are still keen on the franchise? Then ask further:

· Financial details - turnover v profit, debt can be paid out, copy of past 2 financial years, is the business seasonal?

· Agreement areas to consider:

  • It is legally enforceable
  • Do you have exclusive territory
  • Can the agreement be changed? What happens at the end? Who can you buy your supplies from whoever you want?
  • Remember that under the code there is a 7 days cooling off period, from payment franchisor can take reasonable cost

Process:

· Read disclosure advice

· Contact other franchisees

· Check financial details

· Understand the agreement

· Get professional advice

From a legal perspective you need to consider:

· You must do due diligence

· You need business acumen & have a strong financial backing, whether a franchise is a start up or if you are buying an existing one get the last 3 years financials (if existing)

  • Franchisors won't give financial details
  • What is your impression of the Franchisor, what are the trends in this business, speak with current franchisees, why have they left, franchisee criteria, be careful of franchisors offering a guaranteed return
  • System – is it a mature system, has a track record, observe it, area demographics
  • The agreement – need an experienced franchise lawyer, key clauses - terms & options eg 5+5+5, especially on sell, default provisions
  • Have the right business structure and have an exit strategy

Recommendations

1. do your homework

2. seek legal advice

3. assist your lawyer

4. understand your obligations

5. legal costs

Franchisor Step

Franchisors can get further resources from a number of publications including:

  • Profitable Partnership by Greg Nathan gives a good background into franchising and the need to make them profitable
  • The Franchise E Factor by Greg Nathan is the follow up book
  • Compiling a Franchise Operations Manual from the Franchise Council of Australia
  • How to Franchise Your Business from the Franchise Council of Australia

Business considerations in Franchising that you should consider include:

The types of franchises:

· Product (Miele)

· System (McDonalds)

· Processing or manufacturing ( Car Dealers)

· Group Trading (Co-op)

· RAA will be a system franchise

Alternatives to Franchising:

· Distribution Agreement

· Agency Agreement

· Licensed Agreement

· You can fracnhise by default, regardless of what you call it, and you can get caught up in the Franchising Code of Conduct

· Risk – serious implications from the ACCC if you are caught being a franchise by default (RAA may be in this position)

Remember that Franchising is a growth strategy & is templating:

So, can you template your business?

· Build systems

· How do you make it consistant

· Branding control

· Quality control

· Sustainable growth and how to achieve this for everyone involved in the system

· Documentation of everything that must occur to operate the business

Funding cost considerations:

· Need between $50-$200k total with most at $100k to set up a franchise

· Need professionals to do your manual – cost $25-$45k

· Legals - $15-$25k – needs to be a specialist firm

· Compliance costs ongoing – Legal, Franchising Code of Conduct

What do you do first?

· Develop your Brand

  • Make sure that all protection is in place

· Have a business plan & financial model

  • Put franchising into the business plan
  • Completed projected P&L for your franchise
  • Also complete a project P&L for your franchisees
  • If there is not enough market or money in it for all then don’t franchise

· Develop the system

  • Document it all
  • System for everything
  • Process or procedure for everything

Summary

I hope that this quick guide will assist those readers interested in Franchising and some quick steps to identify if this is for you.

I am keen to hear your franchising stories!

All the best! Michael Kromwyk


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