Considering a Franchise

At one time or another, many business owners and operators consider – however briefly – the idea of either franchising their operations, or buying into an established franchise business.

As accounting advisors to small and medium sized businesses alike, we are often asked about the pros and cons of both these options.

Taking on a franchise can seem pretty attractive compared to starting a business from scratch and in the last two years, the number of franchise systems operating in the Australian business market has grown annually by 15%, with many of these being started in the retail, administration and support services industries. All up, there are around 73,000 individual franchise ‘units’ in operation in Australia at the moment, an increase of around 22,000 from a decade ago.

The franchise sector generally provides an opportunity for those with an entrepreneurial mindset who still want the support of established structures, systems and peers around them as they grow their business.

And, while franchised businesses are also feeling the effects of the slowing economy, in many ways they are better protected and better equipped to face the problems ahead of them. A franchise network provides individual operators with a range of systems and support from head office franchisors, as well as a peer network to draw on for advice and ideas to grow their business in their individual areas.

So what are the advantages (and disadvantages) of joining a franchise, as opposed to operating a more traditional business model? There are a number of points to consider here if you’re thinking about getting into franchising:

Cash flow: often a major issue for small and medium sized businesses, cash flow problems can be exacerbated by poor business planning and systems. An existing franchise structure has the budgeting and forecasting mechanisms to offset this, but they need to be robust and accurate for the type of business and the number of franchisee operations involved.

Access to capital: all businesses will need to access capital for growth, always a challenge in difficult economic times. Banks are often more willing to lend to established franchises with existing, proven performance and assets, and sometimes have specific packages available to certain franchises. Some franchisors will help aspiring franchisees by providing vendor finance for the purchase of a franchise.

Costs: existing businesses can join buying groups to secure essential supplies and materials; however, with limited purchasing power it can be difficult to get the best prices and payment terms that are often available to larger competitors. Franchisors can achieve economies of scale and improve their buying power by aggregating the purchasing of all franchisees.

Business processes: it’s often difficult and costly to set up and document business processes, and ensure they are up to date and best practice. For franchise businesses however, this is essential and anyone looking to become a franchisee should ensure they have access to well documented, up to date business processes and policies. Franchisees should also have access to all the relevant patents, trademarks, copyrights and trade secrets critical to the franchise business.

Staffing: it’s always hard to find and hold onto good staff, but a lack of systems and training for employees can make this even more of a problem. A good franchise operation should have employee management processes that include clear job descriptions, employment contracts and training manuals. Some franchisors will also help their franchisees in the employment and training of staff, as well as performance management processes should problems occur with individual employees.

Branding and promotion: it can be expensive and difficult to develop a unique brand if you’re a small business, let alone effectively advertise and promote your business and its brand ‘footprint’. Joining an established franchise gives you access to an established brand, with the marketing materials to keep this front of mind with customers and other audiences. It also cuts down on cost, thanks to joint marketing funds from the franchisee pool that allow greater exposure for minimal expense.

Other professional support: access to lawyers, accountants and other business professionals can be expensive if you’re a single operation. Franchise networks often have better access to experts selected by ‘head office’, and individual franchisees can also speak with other peers for advice and assistance.

Exiting the business: many small business owners struggle with the challenge of exiting their business, often finding it hard to sell the existing operation or pass it on to successors from their families or staff. Franchise businesses however are well-used to succession planning – they constantly market to potential new franchisees and are quite comfortable with helping existing franchisees sell their operation to new recruits.

On the face of it, these are compelling advantages to anyone considering a shift to a franchise model. But it’s also important to remember that, as a franchisee, you are bound by the franchise agreement you sign to acquire the franchise.

These can frequently regulate many aspects of your business, leaving you little room for originality or creativity as a business owner. Some franchisors will also set and enforce revenue targets, codes of practice and other compliance requirements on their franchisees.

It’s important to think hard about whether franchising might work for your business goals, and to get the right advice from your accountants or other business advisors. The life of a franchisee might not be for everyone, but franchise businesses are a growing trend in Australia and, for some business sectors, a franchise arrangement can provide an attractive alternative to more traditional business models.

Author David McKellar

David McKellar is a Chartered Accountant and Director of Allied Business Accountants, an accounting firm specialising in providing strategic advice and taxation services to business owners, investors and Self Managed Superannuation Funds.

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