If you've never owned a business before, buying a franchise can be a smart move - but what should you know about how they work before jumping straight into one?
By definition, the general gist of franchising is based on a marketing concept, which in turn can be adopted by an organisation as a strategy for business expansion. Where implemented, a franchisor licenses its know-how, procedures, intellectual property, use of its business model, brand, and rights to sell its branded products and services to a franchisee. At its core, buying a franchise is a way to start a business by legally using someone else’s expertise, ideas, and processes.
However, like many things in business, there are many associated pros and cons that come with buying a franchise - it’s not for everyone, and it’s important to know the perks and potential limits before committing to this type of trading.
The Pro’s And Con’s Of Buying A Franchise
To own a franchise, the franchisee must pay the franchisor certain fees. The fees allow the franchisee to own the rights to the business's brand, products, and services. The franchisor must make every potential fee known to the franchisee, and although this isn’t always the case, the franchisor should ideally be able to provide ongoing support to the franchisor.
Pro: Franchises offer the independence of small business ownership while still being supported by the benefits of a big business network.
Pro: You don't necessarily need business experience to run a franchise. Franchisors usually - and ideally - provide the training you need to operate their business model.
Pro: Franchises have a higher rate of success than start-up businesses, often due to the above support networks.
Pro: You may find it easier to secure finance for a franchise. It may also cost less to buy a franchise than start your own business of the same type.
Pro: Franchises often have an established reputation, brand and image, proven management and work practices, access to national advertising and ongoing support.
Con: Buying a franchise means entering into a formal agreement with your franchisor, with very real legal ramifications should the franchisee break those terms.
Con: Franchise agreements dictate how you run the business, offering little wiggle room for divergence with your own ideas or concepts.
Con: It’s not uncommon to see restrictions placed on where you operate, the products you sell and the suppliers you use.
Con: Bad performances by other franchisees may affect your franchise's reputation, as you are a part of an overall collective.
Con: Buying a franchise means ongoing sharing of profit with the franchisor.
Con: Franchisors do not have to renew an agreement at the end of the franchise term.
Although buying a franchise is generally viewed as a straightforward and “easier” way to go into business, there are still no guarantees of success. The same principles of good overall business management - such as informed decision-making, hard work, time management, having enough money and providing top notch customer service - still apply.
It’s for this reason that buying a franchise requires the same due diligence that would apply for buying any business. Does your personality, skill set, experience and motivation match the nature of a franchise? For extra guidance, The Franchise Council of Australia has created a free brochure about everything you need to know before potentially signing up to become a franchisee.
If you’re still set on the concept of buying a franchise, then be prepared to complete the same amount of paperwork as you would for any other major transaction. The Franchising Code of Conduct is a mandatory code applied to all business arrangements that fall under the code's definition of a franchise. You will need to get a copy of the code if you are buying a franchise business.
The franchisor must provide new franchisees with the following:
The franchise code of practice
The franchise agreement
The disclosure document
The lease agreement for the premises (if applicable)
The franchising code covers 3 key areas:
It requires a franchisor to provide a disclosure document to prospective franchisees to help them make reasonable and informed decisions about buying a franchise.
It requires a franchisor to provide a franchisee with certain rights in relation to franchise agreements.
It includes dispute resolution procedures for franchise agreements entered into on or after 1 October 1998.
The Australian Competition and Consumer Commission (ACCC) is responsible for enforcing the code. Copies of the code and the franchisee's manual can be obtained from the ACCC.
Speak To The Professionals Before Buying A Franchise
Most potential franchisees will need to take a good hard look at their financial situation to see if the purchase is viable for them or not. However, if understanding your finances isn’t your strong point, then it may be reassuring to know that you’re not alone. In fact, many businesses (big and small) enlist the services of an accountant in order to free up their time while knowing that their financial obligations are already taken care of by the professionals.
Ultimately, the team at Muro believe that every business owner is an entrepreneur. However, accounting does not discriminate - finances break down barriers and are not territorial. If you would like to take a deeper look into your finances, please get in touch with us at Muro today to ensure that you’re on the right path for success.