The pros and cons of buying a franchise

If you’re looking to start a business, buying into a franchise can be a good alternative to starting from scratch. Franchises give small enterprises the competitive advantage of a well-known brand – something which can take many years for an independent venture to build up. You’ll also have access to proven business systems, support and training. Franchises aren’t for everyone though. Your decision to operate one will depend on what you want out of your investment, your lifestyle goals and how you prefer to use your skills and experience. Like any big decision in life, there are clear pros and cons.

While franchises offer a strong framework for success, they do not automatically guarantee success. However, many of the risks that relate to franchised businesses also apply to any small business. It is possible for franchise businesses to fail because the franchise system isn’t successful, but more often than not they fail for the same reasons other businesses fail – economic downturn, lack of management expertise, poor cash flow or changed market conditions. Just like any business, there are advantages and disadvantages which you will need to be comfortable with before embarking on your new adventure.

 

Franchising in Australia statistics

 

Despite a relatively flat retail environment, Australia’s franchise sector continues to grow in total sales turnover and employment.

• Approximately 4% of Australian small businesses are franchises.
• 1,120 different franchise brands operate in Australia.
• Annual sales turnover for the franchise sector is estimated at $146 billion.
• More than 470,000 people are employed directly in franchise brands.
• 26% of franchise brands are in the retail (non-food) industry.
• 19% of franchise brands are in the accommodation and food services industries.
• 15 % of brands operate in administration and support services
• 10% of brands provide other services such as personal services, auto repairs and IT services.

(source: Franchising Australia 2016 Report, Griffith University)

 

Advantages of a franchise:

 

• Association with an established brand, product or service.
• Initial management training and ongoing support.
• Access to established procedures, processes and systems.
• Opportunity for people with little or no business experience to learn core business skills and have access to a successful business model.
• Benefits from group purchasing.
• Benefits from group marketing.
• May be easier to obtain start-up finance for the business.
• Assistance with lease negotiations, site development, and shop fit out.
• Assistance with buying equipment.
• Advertising and marketing support.
• The franchisor has a vested interest in franchisee success.
• You can often gain access to prime sites and locations.
• Franchises have a higher rate of success than start-up businesses.

 

Disadvantages of a franchise:

 

• Less autonomy when making business decisions.
• You may only be able to operate in a restricted area.
• Ongoing fees and profit sharing to the franchisor.
• You might fail to meet the franchisee’s expectations.
• You will be bound by a formal agreement with your franchisor.
• Franchise agreements leave little room for creativity.
• Bad performances by other franchises may affect the overall reputation of the brand.
• Less control if you decide to sell as you will need to follow certain procedures and have your buyer approved by the franchisor.
• Your agreement may include ‘restraint of trade’ provisions which limit your options when the franchise ends.
• At the end of the agreed period the franchisor is not bound to renew the franchise.

 

Checklist for buying a franchise

 

Buying a business is a substantial commitment, both financially and personally. It is important as part of the due diligence process to seek professional guidance and support. Careful, well thought-out decision making at the beginning will be key to your later success. This checklist is designed to help you in the process. It is by no means exhaustive and you should always seek advice before entering into a major business decision.

1. Assess your suitability to own a business.

• Will the business suit your lifestyle, current finances and future financial requirements?
• Do you have the necessary skills and abilities to run a business? Or, are you prepared to learn quickly?
• Are you comfortable with the lifestyle implications of owning and operating a business?
• What is your exit strategy?

2. Assess the background and success of the franchise.

• Is the product or service unique?
• Is it a well-known brand?
• How long has the business been franchised?
• What is the long-term vision and growth plans for the brand?
• Will there be ongoing demand for the product or service?
• Is there consistent quality across the franchise operators?
• How much do you need to invest?
• How professional is the franchising team?
• What is the turnover of franchisees like?
• Are there multi-store franchisees? This can be a good indication of how well franchises perform and how satisfied the franchisees are with the profits and business model.
• Is the intellectual property protected?

3. Find out how much support you will receive.

• What initial and ongoing training is provided?
• Are performance reviews conducted and how often?
• Will you receive assistance to help you grow and improve the business?
• What marketing support will you receive?

4. Understand the franchise agreement.

• Has all the required information been provided?
• How does the franchisor manage business territories?
• Will the franchisor compete with you within your territory or online?
• What are the ongoing costs payable to the franchisor?
• Will you need to contribute to the shop fit-out, marketing, or computer systems?
• What is the duration of the franchise agreement?
• What are the ‘restraint of trade’ clauses?
• Are the current franchisees listed? If so, contact them to see if they are satisfied and if they have encountered any problems.
• Obtain advice from lawyers and accountants with franchise experience before making any final commitment.

 

Looking for more information on buying a franchise?

 

• The Australian Competition and Consumer Commission (ACCC) has some helpful materials on franchising on their website. You might also like to access the Franchising Code of Conduct.
• The Franchise Business Directory lists more than 1,200 franchises for sale in Australia and is a good starting point for your research.
• The Franchising and Business Opportunities Expo  (held in Brisbane, Sydney, Perth and Melbourne) is a good opportunity to investigate different franchise opportunities, talk to franchisors and attend seminars.

 

Further help:

 

Our experienced advisors help clients looking to buy a franchise, start a business, and navigate everyday business challenges. We provide services across a broad range of areas:

• Bookkeeping
• Due diligence
• Systems and processes
• Strategy
• Structuring
• Superannuation
• Tax and Accounting

If you would like to find out more about how Marsh & Partners can help you assess the suitability of a franchise, or start a business, please contact us for advice.  You can reach us on 07 3023 4800 or at mail@marshpartners.com.au

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