BUYING INTO THE DREAM

Turn your ambition into reality armed with all the relevant information.

The ambition to run your own business can turn into a reality quite quickly if you choose to buy a franchise. Here’s what you need to know about franchising….

FRANCHISOR AND FRANCHISEE

Franchising is a business contract in which the franchisor grants the rights to run a branch of the business under its guidelines to the franchisee, who can be an individual, a group of people, or a company.

The franchisee is granted the right to operate the business for a set period of time, what is described as the franchise term. Typically this will be three or five years, but it may be seven, or 10, even 20 years.

There is in most cases a limit to the franchise term and franchisees may be able to renew this; the option is often highlighted in the offer as, for instance, 5+5+5.

The right to renew is not, however, automatic.

FRANCHISE FEES

There is of course a cost to this commercial contract. Typically franchisees pay franchisors an initial franchise fee plus regular ongoing fees, charged monthly. These payments are in exchange for the franchisor’s expertise, tried-and-tested methods and brand power.

Commonly the franchisor will charge a monthly franchise fee and a marketing levy, which must be used specifically for marketing purposes.

The upfront investment and ongoing fees can cover the following: • pre-opening training

• provision of a business model

• the backing of an established brand • access to the franchisor’s operating

systems and processes

• ongoing franchisor support - ie busi

ness, technical

WHAT MAKES A FRANCHISE AN EFFECTIVE BUSINESS MODEL?

It’s effective because of the shared brand, intellectual property and marketing clout. It’s effective when everyone plays by the rules. Compliance and commitment are at the heart of franchising. It is a highly regulated business model, with obligations and responsibilities on the side of both the franchisor and the franchisee.

Franchisees need to consider if the system is legally compliant - in particular, whether it complies with the Competition and Consumer Act and the sector’s overarching regulation, the Franchising Code of Conduct.

Greg Nathan established the Franchise Relationships Institute and is a highly respected franchising expert. He points out that Australia’s Franchising Code of Conduct helps manage "the creative tension between legitimate opportunity and opportunism" with an obligation by franchisors and franchisees to act in good faith.

"Let’s define this as being fair, honest and well-intentioned in delivering on your obligations. For franchisors, this means providing credible leadership, and offering franchisees a proven business model that delivers a reasonable return on their energy and investment. The assumption is of course they work hard and apply the model.

"To deliver on this obligation, franchisors need to also work hard to keep their business models competitive, relevant to customers, and profitable for their franchisees.

A franchisee is effectively running their own small business, with daily decisions to make, and control over how the business is run. As with any other small business, the owner is responsible for operating and developing their own business - it is no different in franchising, but there are guidelines, processes and limits to observe.

Franchising works best when the franchisee and franchisor share a common bond and can develop a relationship built on trust.

It can be a profitable venture but there are no guarantees.

A successful franchise model will deliver franchisees the opportunity to be financially successful. Franchising works when everyone in the partnership is making a profit.

WHY DO BUSINESS OWNERS CHOOSE TO FRANCHISE?

There are various reasons why businesses follow the franchising model:

1. The franchisor may believe in the power

of independent business owners to more successfully run an outlet than a paid employee;

2. The franchisor may want to provide individuals the opportunity to be successful as business owners;

3. The franchisor may require extra capital to expand the business and turn to franchisees to provide this; 4. The franchisor may be looking for national representation and employ franchising as the most effective method of growth.

WHAT DOES A FRANCHISEE BUY?

A franchisee is in effect leasing the important elements of the business - use of the brand, marketing material, the operations manual, any relevant information technology, access to training modules, access to ongoing support which will vary with each brand.

Location based franchises may or may not require a lease to operate from specific premises - this is in addition to the franchise agreement and payments. Some franchises are territory based, and these or may not be exclusive. Territories or locations can be either already established or greenfield (brand new).

Franchisees running a mobile operation may need to add the lease of a vehicle to the costs of the franchise.

Each franchise will outline what the franchisee receives in the package - some offer so-called turnkey packages which gives a business everything required to open up and start trading.

It is crucial for a franchise buyer to research the franchise and the details of the particular business opportunity and to ensure advice is sought from legal and financial professionals - even if the brand is a personal favourite or a household name.

It’s in the early pre-purchase stage that the right decision can be made that will lead to franchise success.

Over the following 20+ pages in this Franchise Basics section, Inside Franchise

Business uncovers some of the issues to consider.