Buyer Beware: 3 Things You Need to Know About Buying into a Franchise
Australia is the franchising capital of the world per capita. Can you believe there are over 1160 franchise systems, with over 79,000 business units operating who employ more than 460,000 employees and contribute more than 144 billion to the Australian economy?
Now take a minute and think about that – franchising is huge in Australia, but how does it work?
Let me explain the three things you need to know: what it is, how you make money from it and why you would want to get into franchising.
Firstly, what is franchising, well the Australian Competition and Consumer Commission (ACCC) define franchising as “A business system that involves one party (the franchisee) paying for the right to operate a replicated business that is associated with a certain trademark, advertising or commercial symbol (usually for a fixed period of time).
In simple English it means that a Franchisee buys the right to operate a system from a Franchisor and for this opportunity they pay a set amount or a percentage of sales as a royalty to the Franchisor.
What is really means is that a Franchisor sells a business opportunity to a Franchisee.
How do you make money?
Ask anyone and they will say Franchising is where the big bucks are. This leads to one of the most common problems in Franchising in Australia which I call “Excitement Head”. When people talk about franchising they have stars in their eyes and enter a franchise agreement without really doing their research. So let me talk about where the money is in Franchising.
The Franchisors main source of income is royalties from the Franchisee. The Franchisee’s main source of income is from the Sales they make. The Franchisors profit comes from the royalties less their operational expenses such as business consultants and support staff. The Franchisees profit comes from Sales less Expenses including the royalty paid to the Franchisee.
So when we define a “Profitable Franchisee” to a Franchisor it is the Franchisee who has the highest turnover, but to a Franchisee it is the person who operates their business model most profitably i.e. High Sales, low COGS; low labour costs.
Do you want to be a Franchisee?
From my experience I would say yes, BUT provided you buy a profitable business unit. It is important if you are buying a franchise that you consider three things:
- Can you be a franchisee? Can you take instruction and work within a system?
- Is the Franchisor reputable and honest in their dealings and is their business model profitable?
- Is the business case on offer to you profitable?
Before you enter any franchise agreement it is an absolute must that you do these three things:
- Speak with other franchisees in the system;
- Conduct a break-even analysis on the opportunity you are investing in and
- Speak with professionals who specialise in franchising; an accountant, lawyer and business consultant. Be sure they understand franchising and have experience in this field.
It definitely is “Buyer Beware” when purchasing a franchise, so take your time and ask heaps of questions. Loose the “Excitement Head” and put on your “Business Head” and enter the world of small business via franchising informed and ready for success.
“The opinions expressed by Smallville Contributors are their own, not those of www.smallville.com.au"
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