Buying a Franchise
Tuesday, June 24, 2014
Franchises are a massive part of business in Australia. Just some of the franchised brands that you may be familiar with would include McDonalds, Hungry Jacks, The Cheesecake Shop, Boost Juice Bars, Poolwerx, Chemdry, Jetts 24 hour gyms, Battery World, 7-11 stores and outfits like Jim’s home services.
There are franchise businesses available in almost every industry and retail sector, and the cost to purchase a licence to franchise varies between each business, but can range from tens of thousands, through to more than a million dollars for a franchise like McDonald’s.
So they're everywhere, but why buy a franchise?
Buying into a franchised business provides the franchise owner with a lot of support that new, non-franchised businesses don’t have the same access to.
The franchisor brings the weight of a proven business plan and a known brand. While it is still up to the franchisee to inspect the business plan and assess the risks involved for themselves, a proven business model can minimise the risk of going into business.
With a franchise, too, there are known, well-defined costs and expected returns. These are stipulated in the franchise agreement. You will know what your costs will be up front, and how much you can expect to earn.
By virtue of being part of a well-honed operation, lots of additional support is also given to franchisees on things like marketing, business training, and ongoing operational support. Plus, it’s common that the franchisor will select the right location and real estate for the business.
The business will also have a prescribed territory, minimizing competition from other stores, and potentially increasing customers in your area.
Some franchisors may even provide financial support and lease the required equipment to you for operation. This is sometimes possible in food franchises where commercial cooking equipment is required. The franchisor can often provide very competitive terms compared to other finance companies and banks because of the scale on which they do this kind of business.
Plus, a franchise business instantly gets access to the purchasing power of the entire group of businesses. Bulk buying of products means a cheaper wholesale price, which can mean a greater margin. Small, stand-alone businesses cannot often access the wholesale prices obtained by bulk-buying groups.
All of these factors are seen to decrease the risk of starting a business when compared to starting a business from scratch by yourself. If you have never been in business before, these factors can be appealing. However, buying a franchise is not a total guarantee of having a successful business.
Who buys a franchise?
The typical franchise buyer is someone who wants to work for themselves, but who also wants to minimise risk and maximise success.
A franchisee also has to be willing to work hard. While there is a lot of support provided within a franchised business, success still comes down to hard work, motivation and dedication.
The franchisor will be looking for someone who is interested in the business as well as interested in being in business. They will want someone who either knows about running a business or is interested in learning. They will seek out franchisees that show commitment, dedication and a real desire to make the business work.
The cost of buying a franchise
The cons of buying a franchise revolve around how much flexibility you will have to make the business work.
When you purchase a franchise, you sign a legally binding agreement that outlines what the franchisor will provide and what you, the franchisee, will do.
Any variance outside of that agreement can mean that your agreement is terminated, leaving you out of pocket and without a business.
If you don’t like the store fit out, the colours, the recipes, the uniforms or the marketing campaigns, too bad. These, and many other core elements of how the business operates, looks and interacts with customers will be prescribed in the license agreement and must be adhered to. Failure to do so will be seen as a breach.
Another problem can arise if not every franchise performs well. This may cause the franchisor business to fold. Even if your franchise was successful, the lack of success of other franchises can lead to the downfall of the entire business structure.
There are also fees and/or a percentage of the revenue that must be paid to the franchisor each year. So, the more you work to make your business successful, the more you may end up paying to the franchisor.
What are the tax implications?
There are several ways that a franchise can be structured. The structure of the business will determine what tax obligations you, as the franchisee, will have.
Ongoing franchise fees are usually tax deductible as a business expense in the financial year that the fees are paid.
Other tax deductions may be the fees for the training you need to operate your franchise, plus the fees and interest charged on any loans you used to purchase the franchise license.
When you buy, sell or transfer the license to operate the franchise, you may be required to pay Capital Gains Tax (CGT) and Goods and Services Tax (GST) on the transaction.
GST, payroll and other business taxes still apply on the earnings of the business and, are the responsibility of the franchisee.
To understand more about franchising and tax, read this handy guide from the ATO. And, as always, talk to your accountant.
What is the Franchising Code of Conduct?
The Franchise Code of Conduct is a mandatory industry code that applies to both franchisees and franchisors. The Code is regulated by the Australian Competition and Consumer Commissions (ACCC).
The Code requires franchisors to provide franchisees with a series of documents at least 14 days before they sign an agreement, or before they pay any non-refundable fees. These documents include:
a disclosure document (sets out key information about the franchise that the prospective franchisee may not otherwise be able to obtain)
a copy of the franchise agreement in its final form
a copy of the Franchising Code.
It is advisable to read the Franchise Code of Conduct prior to considering becoming a franchisee. The Code sets out your rights, obligations, what information franchisors must disclose to you, what your franchise agreement must contain, and what procedure you must follow for resolving disputes.
If there is a dispute, the Office of the Franchising Mediation Adviser (OFMA) may be able to resolve the matter via mediation rather than going to court.
Franchises in Australia
The franchise industry represents sales of around $130 billion each year in Australia. The industry employs more than 600,000 people.
A successful franchise still requires good business practices and a dedicated business owner. If you are considering buying a franchise, do your research, speak with your accountant, a solicitor and other franchise owners.
It is a major decision to buy and operate a franchise, but it is one that many business owners embrace.
How do I buy a franchise?
Once you are ready to buy a franchise, you can choose one of two paths. You can buy an established franchise from its current operators, or you can open a new business in a designated geographic area.
You can also approach an individual organisation directly. On most franchised brand’s websites, there is a section that is specifically for potential franchisees. For example, these are the franchise information pages for McDonalds, Sumo Salad and Poolwerx.
Different laws and rules apply for buying franchises in each state. This useful resource will help you understand the requirements in your state.
The ACCC has a startup checklist for those in the process of buying and running a franchise.
There are many things to consider before buying a franchise. The Franchise Council of Australia provides a wide range of information that will help anyone considering buying a franchise.
Do your research and then, before you make any decisions, speak to your accountant and solicitor. Oh, and good luck, and have fun!