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Buying a Franchise

Guidelines

In Australia today there is a franchise operating in almost every type of business category, with varying levels of complexity and cost.

Prior to buying a franchise, potential franchisees should do the following;

  1. Assess your own reasons for wanting to own a business;
  2. Assess the lifestyle and income implications of owning and operating a business;
  3. Assess the franchise opportunities consistent with 1 and 2 above.
  4. Build your understanding of the franchise relationship by reading the Franchise Guide.
  5. Narrow your franchise search to a few systems, then request further information.
  6. If appropriate, and you are comfortable with the decision, select a system and commence the application process.
  7. Ensure you have adequate borrowing capacity, including working capital, to successfully establish this type of business.
  8. Be sure you receive and evaluate all disclosure material during the application process.
  9. Be sure you receive legal and accounting advice from lawyers and accountants with franchise experience before making any final commitment.
  10. Use the cooling-off period to check your facts and figures and determine if you still want to proceed.

    This is by no means an exhaustive list of things you should consider prior to buying a franchise, but if you work through these 10 steps you will be at less risk of rushing headlong into a hasty and ill-informed decision.


Background Research

If you are curious about franchising, The Franchise Council research facilities can help supply the answers you need.

Understanding the risks and rewards of franchising - This document will provide you with an overview of the things you need to consider as you embark on your research. Due diligence before entering into a franchise agreement is essential. The resources below will help you identify the next steps in your research.

The Franchise Business Directory (www.franchisebusiness.com.au) is a comprehensive web based listing of more than 1300 franchise systems in Australia. The directory is cross-referenced by category and includes an alphabetical index, so finding a particular franchise or type of business is quick and easy via direct links or email.  You can also find various professional advisers for assistance.

Read some FCA publications.  For further details on all FCA publications, click here.

Franchise Costs & Fees

In all business format or package franchise programs, franchisors directly or indirectly collect payments from franchisees for the right to use their brand and to participate in their systems. Franchise fees can range in price (for up-front franchise fees and set-up) from as little as $5,000 to as much as $1 million, or more. Typically, franchisees are also required to pay ongoing fees for franchise support, which may be a fixed monthly amount, or calculated as a percentage of turnover.

Fixed monthly amounts may range from $50 per month up, while percentage fees may range from 2% to as much as 15%. Additionally, a further fixed or percentage of turnover fee may be applied to cover the costs of group marketing.

Get Advice

It is always essential that anyone considering becoming a franchisee receives competent professional advice from qualified and experienced advisors. The FCA can direct potential franchisees to accountants and lawyers who are members of the Council and who understand franchising, which is a specialist field of practice. A comprehensive list of service providers is available on the Franchise Business Directory.

Deal only with FCA Members

Members of the Franchise Council have committed to following the mandatory Franchising Code of Conduct, plus any FCA designated member Code of Conduct. This, in addition to common law rights, increases protection for franchisees from unscrupulous operators. All intending franchisees should ensure that they deal only with members of the Franchise Council of Australia, and ask for proof of an organisation's membership of the FCA.  To see a copy of the latest Membership List visit the Current FCA Membership page on this website.

Type of business

The position of the franchise in the market in which it trades is a vital consideration. You should not only look at the particular franchised business in relation to its own activities, but also make an assessment of the prospects for the overall industry or trade of which it forms a part. The franchise will either be dealing in goods or products, or the provision of services. The accompanying table contains a comparison of the various considerations which should help in making an assessment.

Goods or products Services
1. Are the products new? Is the service to be provided a new one?
2. Have they distinct advantages over their competitors? Has it a distinct advantage over competitor's services?
3. Has the franchised business been thoroughly proven in practice to be successful? Same
4. Is this a product distributorship, or Agency, which is not really a franchise but one which is promoted as a business-format franchise and thus suspect? Does this service have a novel or distinctive element about it which clearly distinguishes it from other similar and competitive businesses?
5. Does it have staying power? Same
6. Is it in a market area which is in a decline? Same
7. Is it in a growth market? Same
8. Is it exploiting a fad or current fashion which is thus transient and short-lived? Same
9. How competitive is the market for the particular products? How competitive is the market for the provision of these services?
10. How competitive is the price of the products? How competitive is the price at which the services are to be offered?
11. Can this competitiveness be maintained? Same
12. What is the source of supply of the products? Not applicable
13. How certain is it that the source will be available for the future? Not applicable
14. Are alternative sources of products of comparable quality and price available? Not applicable
15. Are the products based upon a trade mark? Is there a strong, distinctive trade name associated with the provision of the services? If a celebrity name is used, remember that celebrities come and go, and so too can the related franchise.
16. Are the products produced by a patented invention? Not strictly applicable, although it is possible for a patented product to be featured in a service business so this could still be relevant. Is the service based on an exclusive process?
17. Does the franchisor have their lines of supply properly tied up? Not applicable
18. Is there adequate back up in terms of guarantees and service facilities? Not applicable
19. Could the manufacturer or supplier easily bypass the franchisor and you, and set up their own competitive franchise? Not applicable
20. What is the reputation of the product? What is the reputation of the service, or process?
21. What is the reputation of the supplier? Not applicable
22. If it is a successful franchise newly imported from another country, will it hold a similar appeal in the Australian market? Has it been market tested in Australia by careful and thorough pilot testing? Same

Do not under-estimate the importance of the above questions. Make sure that the proposition has been well enough tested and for a long enough period of time for you to be satisfied that the market really exists and has long-term prospects.

Please remember - and there is no apology for the repetition - that you must not enter into self-employment and franchising if you are not prepared to risk losing your investment. There are no guarantees of success in any form of small business, and even though franchising is by far the most successful form of small business, it is still a business venture with the many of the same risks inherent to any other business venture. That risk must be fully understood and appreciated.

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