Balancing the pros and cons of Australian Franchising
Over the last five years franchising in Australia has experienced steady growth. Annual revenue from franchising now exceeds $100 billion, and franchises are responsible for employing over 500,000 people. The Griffith University’s industry report states that 79,000 business units operated as a franchise in 2016. Over the coming years, this number is expected to continue increasing. Franchising is a long-term commitment that carries with it significant risks and rewards. If you are considering franchising, below, we highlight the pros and cons involved.What is Franchising?
Franchising is a method of business expansion. The business owner (the franchisor) will usually have an established business and process which they can replicate by granting rights to other prospective business owners (franchisees). These rights include intellectual property, trade secrets, and the ability to sell or distribute the goods and services in return for a fee. The franchisor supports the franchise network by providing franchisees with training, guidance and assistance.What are the Benefits of Buying a Franchise?
Intellectual property: Franchisees gains access to use the franchisor’s patents, trade marks, copyrights, trade secrets and any secret processes or formulae. These will be the most valuable assets a franchisee acquires from buying a franchise.
Established reputation: Operating a business under the franchisor’s name and reputation provides franchisees access to an existing client base already familiar with the franchisor’s products and/or services. New business owners, therefore, take on fewer risks opening a business and can ‘fast track’ the process of developing client relationships which may take years to achieve.
Marketing programs: All the franchisees in the system will receive the benefits of the franchisor’s national advertising. These marketing and promotional activities will be available at a lower cost to franchisees than if they attempted these marketing themselves.
Protection: In Australia, the Franchising Code of Conduct (‘the Code’) administered by the ACCC regulates the franchise industry. The Code provides legal protection towards franchises, such as requiring the franchisor to make certain disclosures to prospective franchisees and a cooling-off period to leave the franchise agreement after seven days of signing the franchise agreement.
Support network: The support and benefits provided by a franchise system greatly reduce the franchisee’s risk in setting up a business. The franchisor can help franchisees obtain occupation rights to important trading locations, comply with planning (zoning laws), prepare plans for layouts and provide general assistance in calculating the correct level of stock for when the business opens.
Training: Franchisors will provide comprehensive training to their franchisees and very often their staff.
Less capital: Franchisees will usually need less capital setting up a franchise business than if they were to choose to set up a business independently.
Economics of scale: Franchisees will be able to tap into the bulk purchasing power and negotiating capacity made available by the franchisor.
Research and Development: Franchisees will have the benefit of the franchisor’s continuous research and development programs. The franchisor designs these programs to keep the franchise system competitive and up-to-date to changing consumer and market trends.What are the Negatives of Buying a Franchise?
Level of control: The franchisor usually imposes a level of control over the franchisee as part of the franchise relationship. These controls impact the quality of the service or products delivered or sold by the franchisees. While franchisees own their business, these businesses abide by the franchise agreement and any operations manual. Franchisees must accept that a level of control is essential to maintaining this relationship.
Poor reputation: Franchisees operate a business strongly tied to its franchise network. Misconduct by others in the franchise network will undoubtedly have an adverse effect on the whole franchise chain. As such, franchisees must accept exposure to reputational damages from other franchisees or the franchisor.Conclusion
Buying a franchise business will be a significant investment of your time and money. Before you sign any franchise agreement, make sure you perform due diligence on the franchisor's business. We recommend you speak to a specialist franchise lawyer who can take you through the purchasing decision, including whether the franchising model is a well-suited option for you.
Opened by Anthony Lieu, Mar 6.
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