What is franchising and is it right for you?
First of all, just in case you’re not sure: franchising can have a number of definitions but it essentially a financial and licencing agreement where a franchiser provides the rights for a person or entity to sell its products or services or to use its brand name. As of 2014, over 460,000 people are employed directly in franchising with an annual turnover of $144 billion.
A common concern can be that franchising restricts your rights as a business owner and that franchisers are looking for any chance to suck your finances dry. Despite there being instances of unfair treatment of franchisees by certain brands in recent years, this fear is generally unfounded. As of a 2014 survey of the franchising industry done by the Franchise Council of Australia, only 1.5 percent of franchisees were involved in a substantial dispute with a franchiser over a 12-month period.
The benefits of franchising
There are many benefits to franchising but this does not necessarily mean that it is the right solution for you.
Franchisees gain access to a brand’s networks and the support that comes in the form of established suppliers, POS systems for retail, reporting tools and marketing campaigns and business practices that come packaged in full swing. A franchisee can enter a business without having to do any of the things that can take so much time for a new business, the least of which is gaining credibility and a customer base.
The ability to enter a business without having to worry about the set up only suits certain people. Those with clear views and opinions on how they want to set up a business will not be able to tolerate the various established practices of a franchise. For example, a certain POS system may be used be a franchiser as it links up the reporting of sales to a central network, making it easier for a franchiser to track the success of their brand. A franchisee owner may question whether the POS system works for how they want to run their business, and may be frustrated by being locked into such an arrangement.
Many people enter the world of franchising because they want to ‘be their own boss’. Many franchisees have worked for employers for much of their career and branch off for a sense of freedom. While franchisee work does provide a strong element of freedom on many levels, a franchisee still has a boss (the franchiser) and must occasionally capitulate to a company’s various rules and changes, especially new marketing campaigns or changes to the product and branding. This can be hard for many people to handle, as their business may be flourishing and a significant change in branding runs the risk of alienating their customer base.
It is for this reason that franchising is best for people who find comfort in and even enjoy having solid structure and a hierarchy above them in which they can work.
Tips for ensuring the success of your franchise business
While the majority of franchise arrangements are beneficial, there are some things to look out for and consider to ensure you get the best out of what is one of the biggest decisions of your career.
- Seek legal advice when it comes to your franchising agreement. A franchiser must provide a document, called an information statement, that lists both the risks and rewards of their franchise. Have a lawyer experienced in this area look over the contract of your agreement with a franchiser to see what your rights are when it comes to exiting the business and what power you have in the daily management of your business.
- Do your research on the company. This is one of the most important things to do. Don’t just enter into a franchise agreement with a brand because they have been around for 20 years and you have seen plenty of their shops running around your area. There have been plenty of cases of big names (such as Pie Face) having become ubiquitous businesses in their industry, only to hemorrhage their finances. By the time of its demise, Pie Face had not made a profit in 10 years, the management team had no franchise experience, the brand was in arrears with every landlord and 28 franchisees had failed and been handed back to the company.Not many people would think to research the backgrounds of the management team in a franchise but this is key to understanding the future success of your business. What previous roles has every member of the company had, what successes have they brought previous businesses as well as the franchise business? Demand to see every single CV of the management team, including the CEO, if you are going to even consider buying into their business. You are effectively like an employer at this stage as you are a potential investor. They must prove to you where they have been, where they are now and what plans they have for the future. If you can’t get this information, don’t move a step forward.
- Have the funds to see yourself through the first 6-12 months of your business. You are unlikely to see an immediate profit when entering into a franchise agreement.
- Just because a lot of the work seems to have been taken care for you (such as POS systems, reporting tools, suppliers) this does not mean you can rest on your laurels when it comes to establishing healthy relationships with suppliers, supporting staff in learning the skills to use various tools, and doing your own local marketing for your business.
- Be prepared to do a lot of reporting. Where a sole business owner may not have the pressure to document every facet of their business (much to their disadvantage), a franchiser demands of you to spend a lot of time reporting business metrics to them.