Buying a Franchise
If you're thinking of starting your own business, you may consider buying a franchise. Franchises are a massive part of business in Australia, representing 5 per cent of all Australian businesses according to the Australian Bureau of Statistics (ABS).
Franchise businesses are available in almost every industry, from fast food, to health and fitness, to services and specialist products. Some franchises more widely known than others, and different franchise systems offer different levels of support to help get your business started.
If you're considering buying a franchise business, do your research first and understand how it works. Here, we provide a quick guide to get you started.
Why buy a franchise?
Buying into a franchised business essentially means you're buying management rights to run a business under an established brand name, using the franchisor's set processes and systems. A major benefit of running a business this way is that the franchise owner (franchisee) is given a lot of support that new, non-franchised businesses don't have the same access to.
Some of the key benefits of buying a franchise include:
- Expectations of costs and returns: these will be stipulated in the franchise agreement based on past business performance (though is only an indication of how your business might perform)
- Ongoing support: this includes site selection and real estate, marketing, business training and ongoing operations. Some franchisors may provide financial support and lease the required equipment to you for operation (i.e. commercial cooking equipment for a food franchise)
- Purchasing power: because the franchisor can purchase in bulk for the whole franchise network, products can be sourced at a cheaper wholesale price.
All of these factors are seen to decrease the risk of starting a business when compared to starting a business from scratch by yourself. If you have never been in business before, these factors can be appealing. However, buying a franchise is not a guarantee of having a successful business.
Who buys a franchise?
The typical franchise buyer is someone who wants to work for themselves, but also wants to minimise risk and maximise success.
A franchisee has to be willing to work hard and able to follow the franchise guidelines set out in the franchise agreement. While there is a lot of support provided within a franchised business, success still comes down to hard work, motivation and dedication. The franchisor will be looking for someone who's passionate about the business or industry, and is willing to work hard to build a successful business.
What is the cost of buying a franchise?
Franchise businesses come in all different shapes and sizes, and can range in price from $10,000 to over a million dollars. Initial setup costs will be outlined when you start the application process, and you will need to provide evidence of your financial capabilities before you are granted the right to operate a franchise. You might need to get a business loan to help you fund the establishment costs of the franchise.
There are also fees and/or a percentage of the revenue that must be paid to the franchisor each year.
What are the risks?
When you purchase a franchise, you sign a legally binding agreement that outlines what the franchisor will provide and what you, the franchisee, will do. Any variance outside of that agreement can mean that your agreement is terminated, leaving you out of pocket and without a business.
If you don't like the store fit out, the colours, the recipes, the uniforms or the marketing campaigns, there's not much you can do about it. These, and many other core elements of the business will be prescribed in the franchise agreement and must be adhered to. Failure to do so will be seen as a breach and the franchisor could take legal action.
Another problem can arise if other franchises in the system perform poorly. This may cause the franchisor business to fold. Even if your franchise is successful, the lack of success of other franchises can lead to the downfall of the entire business structure.
How do you buy a franchise?
You can either buy an established franchise from its current operators, or open a brand new business – you can also approach an individual organisation directly. On most franchised brand's websites, there is a section that is specifically for potential franchisees.
There is an application and qualification process to go through to ensure you are financially capable of running the business and will be a good fit for the network. It's also up to you to complete your due diligence, speak with a financial adviser, and work closely with a franchise lawyer to understand all areas of the franchise agreement.
Be sure to read over the Franchise Code of Conduct* prior to considering becoming a franchisee. This industry code sets out your rights, obligations, what information franchisors must disclose to you, what your franchise agreement must contain, and what procedure you must follow in the case of a dispute.
Different laws and rules apply for buying franchises in each state. This useful resource will help you understand the requirements in your state.
Where should you start?
There are many things to consider before buying a franchise: What industry are you passionate about? What can you afford? What franchise system would be a good fit for you? Do your research and, before you make any decisions, speak to your accountant and solicitor.
Good luck, and have fun franchise shopping!
*Sourced from the Federal Register of Legislation at 8 September 2017. For the latest on Australian law please go to https://www.legislation.gov.au
Information is intended to be of a general nature only and any advice has been prepared without taking into account any person's particular objectives, financial situation or needs. You should make your own enquiries, consider whether advice is appropriate for you and read the relevant Product Disclosure Statement or Product Information Document before making any decisions about whether to acquire a product