23 min read
Advantages and Disadvantages of Franchising in Australia
Franchising can offer significant advantages whether you are buying a franchise or considering franchising your own...
Buying a Franchise
Thinking about buying a franchise
Buying a franchise gives you the opportunity to operate your own business as part of an established franchise system - but there is a lot to understand before you commit.
Whether you're starting a new franchise, or buying an existing franchise business, taking the time to understand the opportunity, investigate the franchise system and know what you're agreeing to can help you make a more informed decision.
What are the steps to buying a franchise?
- Find the right franchise
Research the franchise opportunity and consider whether the business, franchise system and commitment are right for you. - Apply to the franchisor
Most franchisors have an application and approval process before they will offer you a franchise. - Review the franchise documents
Understand the disclosure document, franchise agreement and other documents you receive before you commit. - Do your due diligence
Investigate the franchisor, speak with existing and former franchisees, check the numbers and test the assumptions behind the opportunity. - Get professional advice
Obtain legal, financial and business advice so you understand the risks, costs and commitments involved. - Finalise your franchise
Negotiate any changes, satisfy the conditions of the transaction and complete the documents before getting ready to start your franchise.
Buying A Franchise
You're thinking of buying a franchise.
Franchise businesses have higher rates of success than startup businesses (although buying a franchise doesn't guarantee success).
Generally you will be buying an established brand with a successful business model and a developed marketing plan.
However, before buying a franchise, you will need to consider many factors including:
- whether a franchise is the right fit for you (maybe you're more suited to owning your own business);
- whether the franchise you are considering is the right fit for you;
- what structure to use to protect the assets you've worked hard for;
- the length of the franchise and/or any lease;
- any financial advice that you have obtained;
- whether the proposed franchise system is a proven brand;
- whether you can operate your own business later on (or whether there are restraints);
- your legal and commercial risks.
Buying a franchise is different to starting your own business. When you start your own business you have complete control over your decision making. When you buy a franchise you have to operate the franchise in accordance with the procedures and processes of the franchisor.
What should you think about before you buy a franchise?
Is buying a franchise right for you?
We've worked with hundreds of people who have been interested in buying a franchise or starting a business. In our experience, owning a franchise is not right for everyone.
While buying a franchise may decrease the risks involved in owning a business, you are required to operate the business in line with the policies and procedures developed by the franchisor. You generally do not own the goodwill in the franchise business, and when the term of your franchise agreement ends, you lose the right to continue to operate the business. If you don't sell the franchise before the end of the term of the franchise agreement, you may not receive any payment for the goodwill you have generated in the business.
Further, while the established brand recognition and support from the franchisor can be an advantage, the ongoing costs of running a franchise include ongoing royalties, advertising fees and other costs that are payable to the franchisor. These types of costs are not payable if you start your own business.
Our article Starting Your Own Business vs Buying a Franchise considers the pros and cons of either option, and our article Advantages and Disadvantages of Franchising considers the advantages and disadvantages of buying a franchise in more detail.
The ACCC's free online course Is franchising right for me? will also help inform your decision.
Does the franchise business suit you?
While there are many franchising opportunities, not all of them will be suitable to your circumstances.
Consider your strengths and your interests.
You'll also want to know whether operating a franchise will provide you with an adequate financial return and offer a lifestyle that suits you.
For some people financial return is the most important of these factors. For others, lifestyle may be more significant.
A client once told us that they bought the franchise because of the cheesecake (unfortunately the franchisor changed supplier).
What is the length of the franchise or any lease?
Consider the length (or term) of the franchise and if the franchise is operated from premises, the length (or term) of the lease. If the term of the lease and the term of the franchise agreement do not align, you may find yourself in a situation where the franchise agreement ends much sooner than you expect due to the expiry of the lease.
If you are planning to run the business for longer than the initial term, also consider whether the franchise agreement and the lease contain options for renewal.
Will the franchise support your lifestyle?
Before you enter into any franchise agreement you should obtain detailed financial advice, both about your personal circumstances and about the franchise business that you are considering.
It is also essential to seek professional financial advice regarding any financial information provided by a potential franchisor.
We have assisted numerous franchisees who received financial information about a franchise business, only to discover that the franchise did not meet their expectations. While there may be valid reasons for a franchise business failing to perform to expectations, in a number of cases, the figures provided were found to be misleading.
For more detail about misleading or deceptive conduct, see our article What is misleading or deceptive conduct?
What are the risks of buying a franchise business?
Buying a franchise can reduce some of the uncertainty involved in starting a business from scratch, but it does not remove the risks of owning a operating a business.
You should investigate the offer and the franchise system and obtain advice from an accountant, a franchise lawyer, and a business adviser.
Review the Disclosure Document
Part of the process of buying a franchise business is receiving the disclosure document of the franchisor. You should carefully review the disclosure document.
The disclosure document will set out the contact details of franchisees in the franchise system and franchisees who have left the franchise system (if you want to know more about disclosure documents, read our reference article What is a disclosure document?).
We always recommend that you contact both current and past franchisees and ask them about their experiences (the more franchisees that you speak to the better). The ACCC recommends that you contact 5 current and 5 former franchisees.
The ACCC has set out a number of questions to ask both current and former franchisees.
The disclosure document will also include the details of current litigation that the franchisor may be involved in.
Prepare Business Plans and Budgets
Prepare business plans and budgets.
In addition to information about franchisees, the disclosure document will contain financial information about purchasing and operating the franchise.
Franchisors will often provide you with a template to enable you to prepare a business plan or budget. Make sure that you do your due diligence in relation to any financial information provided. Often a franchisor will disclaim any financial information that is given to you, to indicate that you cannot rely on the information.
Remember that any earnings information provided to you by the franchisor must be included in the disclosure document.
Review the Franchise Agreement
When you buy a franchise, you will be required to enter into a franchise agreement. Ensure that you have your franchise agreement reviewed by a franchise lawyer.
Franchise Agreements will contain confidentiality and restraint of trade clauses. Restraint of trade clauses can significantly impact your ability to compete in the market if you decide to leave the franchise (for more information about what is included in a franchise agreement, see our reference article What is a franchise agreement?).
Remember, franchise agreements can include rights of termination that favour the franchisor, and like any business your franchised business or the franchisor's business may fail. If your franchise agreement is terminated or the franchisor's business fails, you may lose your whole investment.
Our articles What happens if the franchisor becomes insolvent? and Understanding Franchise Agreement Termination consider these circumstances in more detail.
Steps to Buying a Franchise
If you have decided that buying a franchise is right for you, there are a number of steps that are typically taken to purchase the franchise business.
1 - Research a Number of Franchise Businesses
You can narrow your search by considering your own strengths and interests and whether any franchises are available in these areas.
Other factors which may help you to narrow the search for a franchise business to buy include:
The Costs and Fees of the Franchise
Franchises differ in upfront costs and ongoing fees. Generally upfront costs include:
- the franchise fee (which is the initial licence fee that you pay to the franchisor to use the brand);
- an initial training fee;
- an advertising launch fee;
- a project management fee (which may be payable to the franchisor if the franchisor manages the fit-out of any premises).
Most franchisors charge an ongoing royalty. An ongoing advertising levy is also common to enable a franchisor to undertake large advertising campaigns. In addition, there may be other ongoing fees such as ongoing software or IT fees.
The franchise disclosure document will contain all of the relevant costs and fees payable during the term of the franchise agreement [Your Guide to Franchise Disclosure Documents in Australia].
Generally, franchises with higher brand value also have higher upfront and ongoing costs and fees.
If you would like to compare the costs and fees of different franchise systems, the Franchise Disclosure Register may be of assistance.
Whether Qualifications are Required
Some franchises require you to have certain qualifications, for example optometry franchises.
Location
Some franchisors allow you to choose a location, while other franchisors require you to operate from an existing location.
Make sure that any location fits with your lifestyle.
Whether you will be offered a new or existing franchise business
An existing franchise business will have been operated by the franchisor or by a previous franchisee. When you buy an existing franchise business you should be provided with the trading figures of the business and you will pay for any goodwill in the business.
If you buy a new franchise, you will operate the business from a new site. The franchisor will not be able to provide you with any trading figures and you will need to make your own assessment of the location and the likelihood of success.
2 - Receive an Information Pack from One or More Franchisors
Carefully read through the information pack provided to you.
If you have any meetings with the franchisor or its representatives make clear notes of those meetings and what is represented to you about the franchise system.
3 - Apply to the Franchisor
During this stage you can expect to sign a confidentiality agreement and pay a deposit.
The disclosure document will set out the circumstances in which the deposit will be refunded.
4 - Receive your Documentation
You should receive from the franchisor:
- an Information Statement;
- a current disclosure document for the franchisor;
- a franchise agreement in the form of the agreement which is to be signed;
- a copy of the Franchising Code of Conduct;
- a copy of the lease (if applicable).
The Information Statement must be provided before the other documents.
If you are purchasing an existing franchise business you will also be given a business sale agreement setting out the terms of the sale.
5 - Conduct Due Diligence and Get Advice
Before you buy any franchise business you should conduct due diligence about the franchise business and the franchise system. This includes obtaining accounting, legal and business advice.
As set out above you should contact both current and past franchisees and ask them about their experiences.
Additionally, you should also prepare business plans and budgets.
If you are buying an existing franchise business have your accountant review the trading figures provided.
6 - Negotiate any Amendments
As a result of the advice that you obtain or the information that you gather when investigating the franchise system, you may want to negotiate either the offer being made by the franchisor or the outgoing franchisee, or the documents that the franchisor proposes that you sign.
For more information about negotiating franchise agreements see our article Are franchise agreements negotiable?.
7 - Sign the Business Sale Agreement
If you are buying an existing franchise business, the business sale agreement will usually be signed before the franchise agreement is signed. The business sale agreement will be conditional upon your approval as a franchisee and you entering into the franchise agreement.
8 - Sign the Franchise Agreement
You are given a 14 day period (in the Franchising Code called "the consideration period") to consider the disclosure document, the franchise agreement, the Franchising Code and if applicable, the relevant lease documents. You can sign the franchise agreement when the consideration period has expired.
Once you have signed the franchise agreement you have 14 days during which you can cool off and terminate the Franchise Agreement (there are generally costs involved in terminating the Franchise Agreement at this stage (these costs must be reasonable)).
9 - Commence Operation of the Franchise Business
Once you have signed the franchise agreement and any other relevant documents and the cooling off period has expired, you can commence operation of the franchise business.
Buy A Franchise FAQ's
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What type of professionals should I consult before making a commitment?
It is advisable to consult with franchise lawyers and accountants, as these professionals are specialised in the specific legalities and financial aspects of franchising.
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Why do I need specialised legal and financial advice?
Franchises have complex agreements and financial structures that differ significantly from other types of businesses, necessitating specialised advice to navigate these complexities safely and effectively.
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Why is it important to understand franchises before committing?
It’s crucial because franchises come with numerous rules and restrictions that one must adhere to, and understanding these can help in making an informed decision about whether this business model suits one's goals and capabilities.
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How can talking to other franchisees provide valuable insights?
Practical questions that you can ask other franchisees include:
- Are they making a profit?
- Are there any hidden and unexpected costs?
- Have they recovered their investment?
- What is the culture like?
- What kind of support do they receive from the franchisor?
These questions directly address key aspects of the business operation and the franchise system, offering insights into profitability, cost management, return on investment, organisational culture and the level of support provided by the franchisor.
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What support and training does the franchisor provide?
The franchisor will normally provide initial training before you commence operation of the franchise business. Established franchisors will generally have detailed training programs.
In addition established franchisors will normally provide ongoing operational guidance.
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What are the exit strategies and resale options?
Exit strategies include:
- operating the franchise for the term of the franchise agreement;
- transferring franchise ownership; or
- selling the franchise business.
If you operate the franchise for the term of the franchise agreement, it is unlikely that you will be paid for the goodwill component in the franchise business on the expiry of the franchise business.
In order to recoup your initial investment the sale of the franchise business is the best option to exit the franchise.
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What are the risks involved in franchising?
Financial Loss
Buying a franchise typically requires a significant upfront investment. There is a risk of financial loss if the business doesn't generate sufficient revenue to cover ongoing expenses and any borrowing costs.
Under Performance
Just because the franchise brand is successful, doesn't automatically mean that your franchise business will be successful. The success of your franchise business can depend on various factors, including market conditions, competition and location. There is a risk that your franchise may not perform as well as other franchises in the network.
Limited Control
Buying a franchise is not the same as starting or buying a business. When you buy a franchise you buy the right to use the franchisor's name, intellectual property and systems for a certain period of time. Generally, a franchise agreement will contain a 5 year term, with a right or rights of renewal. Renewing the franchise is not normally automatic and you may be required to pay further upfront fees to renew (you may also be required to undertake further capital works on renewal).
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