When you start looking for small business ideas, business names and advice on how to start a business, the franchise business model can look really appealing.
Buying a franchise can be a great pathway to running your own business. You could reap the benefits of an established brand with a popular product or service and a great reputation. There’s also access to support with advertising and marketing, and operation manuals to streamline the way you run your business.
On the other hand, franchising gives you much less control of how, where and for how long you run your business.
Before you buy a franchise, it’s important to seek advice from an experienced business adviser, accountant or lawyer. Here are some tips to consider before you commit to a franchise.
Learn everything you can about franchising
You need to learn about franchising and it is highly recommended to get professional advice before you sign up to buy a franchise. You can learn more about franchising through FranchiseED’s free online courses:
It’s important to ask plenty of questions and make sure you understand how the franchise model could affect the way you do business.
Understand the franchise agreement
The franchise agreement is a contract you agree to for a set amount of time, often five years. It covers exactly where and how you will run your franchise – and it’s worth consulting a professional to make sure you understand your rights and responsibilities under every clause.
Once the franchise agreement ends, the franchisor has no obligation to renew your franchise, so the business and any goodwill you’ve built could go back to the franchisor.
Read the disclosure statement carefully
Franchising in Australia is regulated by the Franchising Code of Conduct. Before entering a franchising arrangement, you should be given certain documents including your franchise agreement, code of conduct and disclosure statement.
This disclosure document should list all the current franchisees within the business. Get in touch with some of them to find out about their experiences and any issues they might have faced with the business model or dealing with the franchisor. It’s worth contacting more than one franchisee and even past franchisees for a more balanced view.
It is also important to keep abreast of changes to the code of conduct and what these might mean for your franchise. The code is under regular review so keep informed by subscribing to the Australian Competition and Consumer Commission's Franchising Information Network.
Identify your financial risks
Running a business will always come with financial risks, especially in relation to factors out of your control, such as competition and the state of the local, national and even global economy. There are certain risks to be aware of in franchising that might not apply to other types of business. In particular:
- You’ll need to have extra funds to cover unanticipated costs over the term of your franchise agreement. For example, your franchisor may change their systems or the look of their stores and you will usually be responsible for the cost of these changes.
- Consumer demand may not be the same in every geographical location. One type of franchise or location may perform well, while others don’t find the same success.
- You won’t necessarily have the choice of where you buy your stock. You might find cheaper products through another supplier but your franchisor may have long-term contracts in place with existing suppliers.
Before you commit to buying a franchise, you need to know whether you’re likely to be able to recover your upfront costs and make a profit during the term of your franchise agreement.
Understand your territory
As a franchisee, your territory is the area you’re allowed to serve customers within. If you have a mobile dog wash business, for example, you might have certain postcodes, suburbs or geographic areas that your four-legged customers can come from. Watch out for any overlaps in territories or unclear boundaries, as these could cause major issues competing with other franchisees.
You’ll need to know how many territories the franchisor has, how many are available for sale, how many are planned for the future, whether other franchisees can compete within your territory and how online sales are managed within territories.
Consider restraint of trade
This is a clause which stops you competing with the franchise itself during the term of your franchise agreement and after the agreement ends. Make sure you understand how this will affect you as a franchisee and after your agreement ends.
Find out if there are ongoing fees
In most franchise business arrangements, you (as a franchisee) would pay a royalty fee to the franchisor on a weekly, monthly or yearly basis. You need to know how this royalty fee works, whether it’s a flat fee or a percentage of your sales and whether there are separate fees for advertising and marketing.
For more information, consult a professional
If you would like general guidance or more details about what you should ask your lawyer or accountant about franchising, get in touch with our free small business advisory service.