What you need to know about franchising

Franchising is an increasingly common means of business operation, spanning industries from fast food to retail, professional services to trades. But it is not an option that should be taken lightly, says a franchising expert.

Ever thought about giving up on going it alone and joining an established franchise? Or perhaps you want to explore growth options for your business without having to take on more employees? You’re not alone.

In fact, according to the Franchising Australia 2014 report – conducted by the Asia-Pacific Centre for Franchising Excellence – there are 1,160 franchise chains currently operating across Australia, with a total of 79,000 individual franchise units.

That’s approximately one for every 306 Australians.

Playing such a significant role in the business world, one would assume franchising is a well-understood concept. Sadly, it is not.

As such, My Business asked franchising expert and head of DC Strategy, Rod Young, to set the record straight on some of the common points of misunderstanding, as well as the processes and operations of being part of a franchise network.

Myths and misconceptions

A series of matryoshka, or Russian nesting dolls“I think the biggest myth that franchise owners come to the table with, and quite frankly I think it’s propagated by naive franchisors, is that if you buy a franchise, you’re going to be successful. At the core of that [belief ] is that the reason you’re going to be successful is because the franchisor is going to make you successful. This is a huge myth,” explains Rod.

“If you’re going to be successful, it’s going to be up to you.”

He adds that this myth about the notion of success in a franchised business may have been perpetuated by businesses, rather than individuals.

Having worked in the franchising sector for 33 years, this is a falsehood that he has become all too familiar with.

“[People buy into] the so-called ‘lifestyle franchise’ that’s promoted ... if this is your business, you know the sort of work that you’ve got to do to actually own and run a business,” he says.

“If you look at all small business owners, very, very, very few of them – if any – should have what I describe as a lifestyle business. To be successful in business today, you’ve got to put in the work and the time and effort.

“Business today is moving towards a 24/7 environment, and so you’ve got to understand that owning your own business really takes commitment, and owning your own franchise takes the same sort of commitment.”

Regulation and compliance

Did you know that here in Australia, franchising is a heavily regulated business? As well as industry bodies such as the Franchise Council of Australia, there is a national Franchise Code of Conduct enshrined in law and regulated by the Australian Competition and Consumer Commission (ACCC).

“The ACCC is a fairly powerful policeman of those franchisors that are not complying with the code,” explains Rod.

“They are not only beating up big organisations about anti-competitive behaviours, they also look to the franchising marketplace to see if they can identify franchise companies that are not complying with the franchising code.”

This legislation is designed to protect franchisees from losing their investment to bogus franchise operators, as well as to limit the number of disputes that reach the courts.

“The result is that the amount of litigation in franchising is at record low levels – I’m talking one or two franchisees per hundred franchises in the marketplace,” Rod says.

“When we see franchise satisfaction surveys, it is rare or unusual to find substantial franchisee dissatisfaction.”

The franchise agreement

Far from being a standard document, the franchise agreement is – and, according to Rod, should be – bespoke to that particular business, outlining all the responsibilities, practices and support provisions that come with owning a franchise.

“My strong recommendation is that you need to not only get legal advice from somebody who is experienced in franchising to have a look at your franchise agreement, but very importantly, you should also read it in detail and understand every clause,” Rod advises.

“The signing of a franchise agreement isn’t the end of the transaction, it’s actually the start of a long-term relationship, typically five to 10 years, maybe.”

Another aspect covered by franchise agreements is termination conditions, including what will happen should you decide to sell your franchise. These are known as assignment provisions.

“Those assignment provisions might range from paying part of the goodwill or the proceeds of the sale to the franchisor; they might include having to refurbish or bring up to standard your retail location or your vehicle if it’s mobile; and they typically will contain clauses about the calibre and quality of the buyer,” explains Rod.

He says a franchise agreement should also outline the role of goodwill and brand perception, as this is integral to what the franchisee is purchasing.

“What type of agreement would you be happy for the franchisor to have with your neighbouring franchisee if that franchisee ran off the rails and started to damage the goodwill and the customer base of the franchise network as a whole?”

Responsibilities as a franchisee

A series of 3D modelled figures representing franchisees, wearing tiesJust as it is not a case of ‘set and forget’ for a franchisor to sell a business unit, franchisees can’t expect to simply hand over their cash and think their work is done.

Franchisees take on a responsibility to represent the brand to the best of their ability. This means meeting relevant legal and professional obligations, and upholding the responsibilities outlined within the franchise agreement, such as maintaining the store or vehicle in a clean and welcoming state, and hiring reputable and responsible employees.

Rod says there is another little-known requirement of franchisees.

“They need to provide a certificate from their accountant and a certificate from their lawyer to the franchisor to say, ‘We have taken advice on the franchise agreement under financial considerations’, or sign a form saying, ‘We have been advised to take advice and we have chosen not to’.”

Don’t go in blind

Ultimately, going into franchising is much like any other form of business – go in with your wits about you, do your research and make decisions based on the numbers, not emotions.

“Talk to as many franchisees as you can, especially those that are in locations [or demographics] that you are potentially going into,” advises Rod.

He suggests asking these questions:

  • Are you profitable?
  • Are you achieving the profits that you thought you would when you first went into the business?
  • How long do you think you will be in the business?
  • How is your relationship with the franchisor?
  • What sort of support does the franchisor provide you?
  • Would you buy this franchise again?

“If you ask those questions, you will get a very strong indicator ... across a cross-section of franchisees,” he says.

“Remember the old saying: ‘If you want to soar like an eagle, don’t hang about with turkeys’. That is so true of franchising, and you need to have an understanding of who your peers are, because that will give you an indicator of the degree of satisfaction you might have within the network – these are the people that you would be rubbing shoulders with.”

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