Paying for the rights to run a business with an established name, marketing and operating procedures offers a new business owner guidance and assistance from the start. However, it also means you need to follow the franchisor's system of running and marketing the business, which may not suit everyone.
Understand the different systems of franchising
There are two main types of franchise you can consider:
Product and trade name franchising
Franchisees are granted the right to distribute a manufacturer's product within a specified territory or at a specific location, generally with the use of the manufacturer's identifying name or trademark, in exchange for fees or royalties.
The franchisee sells the franchisor's product directly to the public (e.g. new motor vehicle dealerships).
The franchisee manufactures and distributes the franchisor's product under licence (e.g. soft drink bottling arrangements.
Business format franchising
The franchisee purchases products for retail sale from a franchisor and sells the products to the public (e.g. hardware and automotive product stores).
The franchisor markets a service, or a product under a common name and standardised system, through a network of franchisees (e.g. McDonalds).
Tasks before you commit
Do your research
Explore current franchising opportunities, and be wary of franchisors who make inflated franchise-income claims.
The Australian Competition and Consumer Commission (ACCC) publishes a franchisee manual which offers a useful guide on what to look out for when considering buying a franchise. The manual provides detailed information about franchising, and what you need to look out for when doing your research and verifying the franchisor's claims. Franchise Council of Australia also offers a useful set of guidelines on what to look out for.
Work out your finances
Buying a franchise requires a substantial franchise and set-up fees – determine how much you'll need and whether you'll need to raise funds.
Request further information
Once you've decided on the particular franchisor to buy from, request the franchisor's Disclosure Statement – a legal requirement under the ACCC Franchising Code of Conduct for all franchisors to provide specific information to potential franchisees to help them in the evaluation process.
The Disclosure Statement will contain:
- financial information
- past and projected financial performance
- market reputation
- information on previous and current franchisees and any disclaimers
Information Statement for prospective franchisees
When you express interesting in buying a franchise, the Australian Competition and Consumer Commission (ACCC) requires the franchisor to provide an information statement to you. The statement must be provided as soon as possible but no later than 7 days after interest is expressed.
The information statement highlights issues to think about before becoming a franchisee. These include the following:
- risk of franchising
- research and due diligence
- questions you should ask before buying a franchise.
You can download a copy of the information statement for prospective franchisees from the ACCC website.
Speak to current franchisees in the system, and ask them questions such as:
- Are they making a profit?
- Are there any hidden and unexpected costs?
- Have they recovered their investment?
- What level of training and marketing support do the franchisors provide?
- What employee liability will I take on, including long service leave?
Make sure you receive legal and financial advice from franchise lawyers and accountants before you commit to the franchisor.