Advantages and Disadvantages of Franchising

Updated 12 July 2024

Franchising as a business growth strategy in Australia is very successful. However, it is important to carefully consider the advantages and disadvantages of franchising before making the decision to either franchise your business or buy a franchise.

Guide to Franchising Your Business

Guide to Buying a Franchise

In this article, in addition to considering the franchising sector in Australia, we will look at 5 key advantages and disadvantages of franchising your business and 5 key advantages and disadvantages of buying a franchise. These are not the only considerations to be taken into account when thinking about franchising, but they will help you to make a more informed decision.

The Franchising Sector In Australia
5 Advantages of Franchising Your Business
5 Disadvantages of Franchising Your Business
5 Advantages of Buying A Franchise
5 Disadvantages of Buying A Franchise
FAQ's

The franchising Sector in Australia

Some of the most recent data about the franchising sector in Australia was published as part of the 2023 review into the Franchising Code of Conduct. As part of the review process, the Australian Bureau of Statistics (ABS) was asked to provide a report to Government.

In its May 2024 Response to the Independent Review of the Franchising Code of Conduct, the Australian Government noted that the franchising sector in Australia employs around 520,000 people and contributes more than $135 billion each year to the Australian economy. There are more than 1,100 franchisors and 70,000 franchisees operating in Australia, with the majority of franchisors and most franchisees being small businesses.

As part of the independent review, the ABS estimated that of the approximately 1,100 franchise systems, there were 269 franchise systems operating in the retail trade sector (18,249 franchisees), followed by 184 franchise systems in accommodation and food services (7,438 franchisees).

In addition the ABS noted that the number of franchise systems operating in Australia has remained relatively stable in the period 2014 to 2023, however the number of franchisees operating in the franchise industry in Australia declined by about 5.2% between 2014 and 2023. In comparison, the overall number of businesses in Australia grew by about 28% between 2014 and 2023.

The Franchise Disclosure Register also shows that a number of franchisors are operating a combination of franchisor owned or operated stores and franchised stores. For example, in Australia as at October 2023*:

Betty's Burgers had 54 franchisor owned or operated stores and 2 franchised stores;
Grill'd had 140 franchisor owned or operated stores and 28 franchised stores (owned by 17 franchisees);
Guzman Y Gomez had 62 franchisor owned or operated stores and 119 franchised stores;
Zambrero had 35 franchisor owned or operated stores and 228 franchised stores (owned by 193 franchisees);
McDonalds had 153 franchisor owned or operated stores and 885 franchised stores (owned by 204 franchisees).

5 Advantages of Franchising your business

Franchising offers a way for an entrepreneur to grow their business while sharing risk. There are many advantages of franchising your business, including capital infusion, risk sharing, operational efficiency, scalability and economies of scale. We have set out 5 of the key advantages below.

1- The Franchisee Invests the Capital

One of the main benefits of franchising is capital infusion. When the franchisee commits the essential capital to set up the franchise outlet, it significantly lowers the financial risk for the franchisor in contrast to growing organically.

Franchising allows you to grow your brand without increasing debt or the cost of equity. Your franchisees will invest the necessary capital, including fit-out costs, an initial franchise fee (paid to you), and working capital, to establish each franchise outlet. This can be particularly beneficial if you plan to expand your business by opening stores in different locations.

In addition, the franchisee may also enter into a lease with the landlord, reducing another one of the risks involved with operating multiple sites.

2 – The Franchisee has a stake in the success of the Franchise Business

In addition to the benefits of franchising from a risk sharing perspective, franchisees will generally outperform managers, both in generating turnover and in keeping an eye on expenses. For example, labour costs are generally better managed by a franchisee, as franchisees are usually more careful with wages and scheduling.

Unlike in an employment relationship, a franchisee has a financial stake (and risk) in the business. It is in the franchisee’s interests to maximise the profitability of the individual franchise business.

3 – The Franchisee is responsible for the day to day operation of the franchise

Related to the franchisee having a stake in the success of the franchise business, a further benefit of franchising is operational efficiency. A franchisee will often work in the franchise business and is responsible for employing and training staff.

If you are not responsible for the day to day operations of the franchise business, this will allow you to focus more on the big picture, including innovation and brand management.

Further, you may be able to leverage the local knowledge and relationships of the franchisee in both building your brand and customising your product or service.

4 – Growth

The advantages of franchising for business scalability and brand extension are significant. Franchising generally enables you to scale and grow your brand more quickly because you are not constrained by either financial or personal resources.

If your business goal is to open 10 locations in the next 12 months, each costing $300,000.00, you would need to find $3,000,000.00 plus working capital to grow the business without franchising or licensing. You would also need to find employees to operate and manage the locations.

In addition to contributing the capital, franchisees do a lot of the “heavy lifting”, such as selecting the location, overseeing the fit-out and managing the day to day operations, including local area marketing.

Growth often builds on itself. As brand presence increases, the pool of prospective franchisees also increases.

5 – Greater Buying Power

Franchising enables you to take advantage of economies of scale, because as the franchise network grows, you will not only have an increased customer base but also more bargaining power with suppliers. This means that you can negotiate better deals and discounts, resulting in cost savings for both you and your franchisees. With a larger network, suppliers are more likely to prioritise your business, giving you access to higher quality products or exclusive offers.

In addition to increased bargaining power, expansion also allows you to customise your products or services to better meet the needs and preferences of your customers. For example, if you own a coffee franchise, as your network grows, you can work closely with suppliers to develop your own unique blend of coffee. This customised blend can become a distinguishing factor and a competitive advantage for your brand, attracting coffee enthusiasts and loyal customers.

5 Disadvantages of franchising your business

While there are numerous advantages to franchising your business, it is important to consider the disadvantages of franchising as well, including loss of brand control, quality control issues, challenges of franchisee management, legal and regulatory issues and reputational risk. Here are 5 key disadvantages of franchising your business.

1 – Loss of Control

A major disadvantage to franchising your business is the loss of control. The flip side to the franchisee being responsible for the day to day operation of the franchise business is that you do not have control of the day to day operation of the franchise business. Consequently, you may encounter brand control issues and quality control issues.

In order to maintain consistency in the quality of your product or service, it is essential that your systems and processes are clearly documented and that your franchise documents adequately support franchisee compliance.

In addition to systems and processes, adequate training for franchisees and their employees will also assist to maintain consistency and quality across the franchise network.

Our article Disadvantages of Franchising - Loss of Control explores the topic of loss of control in more detail.

2 – Training and Continued Support of Franchisees

Another disadvantage of franchising your business is the resources required for training and continued support and management of franchisees. Developing and implementing a comprehensive training program for franchisees requires time and resources, as does the provision of ongoing support and franchisee management.

A common complaint made by franchisees is that their initial training was very basic and that they commenced operating the franchise business without really knowing what to do.

Franchisees also require ongoing support and management, which is crucial for their success and the overall growth of the franchise network. This support and management may include various aspects such as marketing assistance, operational guidance, and continuous communication.

To provide effective ongoing support to franchisees, you may need to allocate additional resources and employ specialised staff.

3 – Poorly Performing Franchisees

Perhaps one of the greatest challenges for a franchisor is managing poorly performing franchisees.

Often a franchisee is “locked in” to their franchise, due to financial investment and may be forced to continue to operate the franchise business when they are no longer motivated to do so.

If a franchisee is not performing and is unhappy, they can be difficult to move on and they can damage your brand.

Our article The Challenges of Poorly Performing Franchisees explores this topic in more detail.

4 – Compliance Costs and Risk

Legal and regulatory issues are a further challenge of franchising. Franchising in Australia is heavily regulated. You need to ensure that you comply with the Franchising Code of Conduct and the Australian Consumer Law. In addition, you need to ensure that franchisees are complying with relevant laws such as the Privacy Act 1988 (Cth) and the Fair Work Act 2009 (Cth) (the Fair Work Act).

A - Complying with the Franchising Code of Conduct

The Franchising Code of Conduct (the Franchising Code) is a set of regulations that governs the relationship between franchisors and franchisees in Australia [What is the Franchising Code of Conduct?]. Franchisors can face heavy penalties if they do not comply with the provisions of the Franchising Code.

Under the Franchising Code, franchisors are required to:

act in good faith [What is good faith in franchising?];
provide disclosure of relevant information to potential franchisees;
update their disclosure document annually [What is a disclosure document?];
comply with marketing fund requirements (including annual requirements) [Franchise Marketing Fund Requirements];
comply with dispute resolution processes;
register a Franchisor Profile on the Franchise Disclosure Register [The Franchise Disclosure Register];
comply with regulations in relation to franchise agreements.

B - Complying with the Australian Consumer Law

In addition to the Franchising Code, franchisors also need to comply with the Australian Consumer Law (the ACL). The ACL deals with franchising issues such as:

Misleading or Deceptive Conduct [What is Misleading or Deceptive Conduct?],
Unconscionable Conduct [What is Unconscionable Conduct?], and
Unfair Contract Terms [Unfair Contract Terms].

C - The Fair Work Act

The Fair Work Act sets out the minimum employment standards for all Australian workers, including those employed by franchisors and franchisees. It covers areas such as wages, working hours, leave entitlements, and workplace health and safety.

In 2017 “franchisor liability” laws were introduced which included franchisor accessorial liability for serious contraventions of the Fair Work Act by franchisees.

Our article Franchisor Liability and The Fair Work Act considers this issue in more detail.

5 – Managing Growth

While the advantages of franchising for scalability and brand extension are significant, the disadvantage of “fast growth” is ensuring that your new business as a “franchisor” has the resources required to adequately manage the franchise network.

The business of franchising and being a franchisor is different from operating the business that you have franchised. You will need to ensure that you have the staff and the systems that can support an expanding franchise network.

There are ongoing challenges with franchising as the franchise grows, including the challenges of franchisee conflict, franchisee management and reputational risk. Franchisors can often feel overwhelmed by these challenges if they do not have the processes and the staff to assist.

5 Advantages of buying a franchise

There are many advantages of buying a franchise including working with an established brand and proven business model, being provided with training and support, having access to developed marketing and advertising campaigns and regulatory protections.

These advantages combine to provide a lower failure rate for franchises as compared to independent start ups. This may be attributed to the proven business model and existing customer base that a franchise can offer.

While these are not the only benefits, we have focused on 5 key advantages of buying a franchise below.

1 – Brand Name Recognition

The main advantage of buying a franchise is brand name recognition.

The franchisor has already done the work to establish the brand, which means that you do not have to put in the time and resources to build the brand from scratch.

Well established franchisors provide you with an identity and a system which has proven to be effective and has a market impact. This brand recognition not only helps you stand out in a competitive market but also provides a sense of security. By aligning yourself with a well-known brand, you may be protected from market conditions, thanks to the experience of the franchisor and the strength of the established brand.

Furthermore, buying a franchise gives you the opportunity to benefit from the established recognition that customers have for the brand. Customers who are familiar with the brand are more likely to trust and choose your company or service, giving you a head start in attracting customers and generating revenue. This built-in customer base can significantly reduce the time and effort required to establish your business and start making profits.

2 – TURNKEY OPERATIONS

In addition to brand name recognition, another advantage of buying a franchise, is the possibility of purchasing a turnkey business.

Purchasing a turnkey business considerably simplifies the start-up process. With a turnkey franchise, you are provided with a fully equipped and operational business, ready to run from day one. This not only saves you time and effort in setting up the business, but also reduces the risks associated with starting a new venture.

The turnkey nature of the business ensures a smooth transition into ownership and operations, giving you a head start in achieving your business goals.

3 – Support and Training

Another advantage of franchising is comprehensive training. Well established franchisors will train you in everything from technology, to accounting, to standing behind the counter and taking money.

Training and support make the franchise model a much less riskier venture than buying a stand alone business or starting a business from scratch as:

franchisors are generally willing to help you to ensure the success of the franchisee.
you also have the opportunity for support from other, more experienced, franchisees.

4 – ADVERTISING AND Marketing

In addition to the other advantages of buying a franchise, a major benefit of franchising is the opportunity to take advantage of national advertising campaigns. These campaigns may be included in the upfront franchise fee or an ongoing monthly fee that you pay to the franchisor.

National advertising campaigns can have a significant impact on your business. They help to raise brand awareness and attract customers on a larger scale. The frequency and scope of these campaigns are often beyond what a small business would be able to afford on its own. By participating in these campaigns, you can tap into a wider customer base and gain exposure that would otherwise be difficult to achieve.

National advertising campaigns help to establish and strengthen the brand identity of the franchise. Customers are more likely to trust and choose a brand that they are familiar with. This built-in customer base can greatly accelerate the growth of your business and contribute to its overall success.

Furthermore, a franchise network's ability to adapt to market trends is crucial in maintaining its competitive edge. With a strong brand and established customer base, a franchisor may be able to respond to changing consumer preferences and implement new strategies to meet their needs. This agility is especially valuable in industries where trends and technologies evolve rapidly, such as the food and technology sectors.

5 – regulatory protections

Franchising in Australia is heavily regulated which adds a further level of security and structure to the franchising model.

Franchisors must comply with the Franchising Code of Conduct and the Australian Consumer Law.

Before you enter into a franchise agreement, franchisors must follow the disclosure obligations required under the Franchising Code. Disclosure Obligations include:

the provision of a Franchisee Information Statement;
the provision of a disclosure document which provides information about the franchisor and the franchise;
the provision of a Key Facts Sheet which provides a summary of the information contained in the disclosure document;
providing a copy of the lease or agreement to lease for any premises from which the franchise business is to operate.

5 Disadvantages of buying a franchise

While there are numerous advantages of buying a franchise, there are also disadvantages to buying a franchise including high initial investment, ongoing fees and royalties, limited autonomy, strict renewal terms, market saturation and negative brand publicity. Here are 5 key disadvantages.

1 - initial Costs and Fees

One of the disadvantages of franchising is the high initial investment. Buying a franchise is not cheap, you will usually need to pay

an up front franchise fee, which is a licence fee for the right to use the brand;
a training fee, which covers the initial training provided by the franchisor;
an advertising launch fee, if the franchisor conducts an initial marketing or launch campaign;
a project management fee, if the franchisor manages the fit out of the premises.

In addition to the fees listed above you will need to pay the cost of the fit-out of the premises, equipment and inventory.

A further disadvantage is the royalty fees. You need to be aware of the ongoing fees. In addition to the initial franchise fees, ongoing fees are payable by you to the franchisor. However, the flip side of this is that an established brand name should provide you with recognition and revenue. There are numerous examples of franchisees who "de-badged" to avoid paying ongoing royalties, only to find that their revenue substantially decreased without the established name.

In addition, some franchisors will require you to refurbish franchisee stores to keep up with a changing image or theme. These possible refurbishments can cost in excess of $150,000.00.

2 – Lack of Independence

Another disadvantage of franchising is lack of independence or limited autonomy. The controls and limitations imposed by the franchisor can include limitations on products, pricing, employees, policies, territory, marketing, working hours and other areas deemed critically important to the success of the franchisor and the franchised business as a whole.

There may be little freedom of scope for you to be creative; almost every aspect of operating the business will be regulated.

Further your ability to sell or transfer the franchise business is likely to be limited. Most franchised systems have some restrictions or obligations regarding the sale or transfer of a franchised business.

Our article on Franchise Autonomy considers this issue in more detail.

3 – Guilt by Association

A disadvantage of franchising associated with brand name recognition is reputational risk. If a franchisor or other franchisees are receiving bad press or suffering from poor public perception then you may ultimately suffer.

While there are many excellent franchisors in Australia, not all franchise systems are soundly based or well run.

You should conduct comprehensive research on the franchisor and only enter into franchise systems which have a time tested and solid reputation within the industry.

4 – Limited Growth Potential

One of the disadvantages of buying a franchise is that the growth potential of the venture is often limited compared to stand-alone businesses. Franchisors typically impose territorial limits on franchisees, which dictate where franchisees can operate. These limits are put in place to protect the brand and prevent franchisees from encroaching on each other's territories. However, this can restrict expansion opportunities for franchisees who may want to explore new markets or expand their operations beyond the designated area.

In addition, franchise agreements only allow you to operate the franchise business for a specified term. While you may be able to renew the franchise agreement at the end of the term, you may not necessarily be offered a renewal and there may be reasons why you are not able to renew. There are usually further fees and costs which are required to be paid to the franchisor on renewal.

5 – Restrictive franchise agreements

Franchise agreements tend to be to the advantage of the franchisor.

Franchise agreements can contain heavy penalties if you breach certain clauses, including the ability for the franchisor to terminate the franchise agreement and to seek monetary compensation from you.

You should always seek your own legal advice before you enter into a franchise agreement no matter how reputable the franchisor is.