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In recent years, about one in six Australians have considered starting their own business. You may therefore ask yourself why the aspiring entrepreneur would buy a franchise at all? Given the low barriers of entry in Australia relative to other international markets, it is generally understood that an Australian can start a business with relative ease. Nevertheless, there are many pitfalls and commercial risks for the inexperienced entrepreneur. Therefore, in some cases buying a franchise can be a good compromise for the aspiring entrepreneur to consider. This article will provide a comparison of the pros and cons of franchising to help you weigh up whether this puts you closer to achieving your business goals. 

If you are considering a franchise opportunity, you should come to an informed decision by: 

  • realistically assessing your skills, experience and industry connections;
  • considering both ‘pros’ and ‘cons’ to franchising;
  • conducting your own due diligence; and
  • knowing how to identify good franchisors, well-developed systems, or brands with significant goodwill.

What Is a Franchise and Why Buy One? 

A franchise is the opportunity to own and manage a business that: 

  • operates as part of a network of similar businesses; 
  • is identifiable by a common brand; and
  • is easily recognised for offering a consistent range of products or services. 

For example, a Baker’s Delight franchisee would operate their bakery as part of a network of other businesses which identify with the ‘Baker’s Delight’ brand. With over 700 locations across Australia, the USA and New Zealand, a customer is likely to have encountered the brand more than once. Further, customers will generally understand that the owner of one Baker’s Delight location does not also own the other stores which share the same branding.

The franchisor owns the intellectual property rights to the business brand. However, each franchisee benefits from the licence to display and use the brand name and operating procedures for their franchise agreement’s duration.

By fitting out the store in a consistent way that also displays the common brand names and logos, a Baker’s Delight franchisee will benefit from the likelihood that their customer has a degree of trust and familiarity with the consistent range and quality of baked goods available at any Baker’s Delight bakery location. 

Other Types of Franchises

In addition to well known retail and food hospitality franchises, there are also many successful home-based, mobile cleaning, professional services and e-commerce franchises, that may often be under-appreciated. These franchises feature the same characteristics, in that a franchisee will operate as a part of a network of other businesses who may be servicing their own exclusive subset of customers and clients. Buying a home-based or mobile franchise usually offers you an opportunity to join a franchise network at a lower cost. It also provides the ongoing benefit of not worrying about a lease or licence fees associated with operating from physical premises.  

Franchising vs. Establishing Your Own Business: Pros and Cons

Establishing your own business allows you to tap into a market and curate your own unique service or product offering. By contrast, when you buy a franchise it presents you with the opportunity to benefit from a proven business concept. You will likely find that there is a limit on changes you can make to the franchise without the franchisor’s agreement. Nevertheless, buying a franchise can be quite an accessible option for business owner‘s who are concerned about or inexperienced with:

  • creating a business plan;
  • building a profitable business model;
  • developing a full range of products and/or services;
  • developing a business website;
  • generating and maintaining a high level of social media engagement; and
  • designing signage and promotional material for the business.

Additionally, when setting up your own business, its success is likely to depend on a combination of factors, including:

  • your entrepreneurship skills;
  • the effectiveness of your marketing strategy; 
  • your social media presence;  
  • the products or services you offer;
  • goodwill of the business name; and
  • the profit margin for the supply of your products and services (rebates).

When you buy a franchise, the success of the business is likely to involve the same factors outlined above, in a different way. 

Entrepreneurial Skills

Every business owner brings a different combination of entrepreneurial skills to the business. Nevertheless, many business owners would benefit from starting with a proven business model with established systems and processes in place. Therefore, buying a franchise is great for entrepreneurs who are less confident with their skills or looking to develop their skills with the safety net provided by a franchise model.

Some of the key benefits include:

  • buying a ‘business in a box’; 
  • confidence observing a business model that has been reality tested; 
  • receiving access to the franchisor’s operations manual that provides you with guidance on how to conduct daily business procedures; and
  • having instruction on a set range of products or services you can offer to a customer.

Despite the many benefits, you should also be aware that the franchisor’s assistance and support will not extend to helping you manage your resources. For example, franchisees still need to create their own business plan and manage their finances and people resources accordingly. A failure to manage your resources correctly may also be in breach of your franchise agreement.

For instance, the franchisee often has a contractual obligation to the franchisor to ensure they comply with employment laws. Therefore, in this way, a failure to pay all team members the correct wage or salary may be deemed a breach of the franchise agreement.

Marketing Strategy

Every business owner will be aware that promoting your business well can make a noteworthy difference to its success. When you buy a franchise, you can often benefit from marketing support from the franchisor by:

  • having your business location/contact information on a central business website;
  • having access to a landing page/domain for your specific franchise territory;
  • being connected to a central Facebook account (and having higher engagement with consumers and clients);
  • having seasonal promotion campaigns developed for you;
  • being provided with promotional flyers or signage required for promotional campaigns;
  • having a regular review of social media platforms to maintain a high level of social media engagement; and
  • collecting market research data and having a centralised marketing strategy.

As an entrepreneur starting your own business, you may find it challenging to create a comprehensive and effective marketing strategy. Particularly in your first year, you are unlikely to have the experience, industry insight or funds required to develop and run an effective promotional campaign to generate a high level of customer or client awareness of your new business. 

Business Brand 

The reputation of your business brand may be considered the core of your marketing strategy. Customer or client goodwill can be a key factor that drives buying or purchasing decisions. When you buy a franchise it often allows you to benefit by providing:

  • confidence in knowing the franchisor has invested in developing their full range of products and services;
  • collective goodwill associated with the franchise business name, logo and related visuals within the community;
  • exclusive branding that is backed by trademarks that are registered with IP Australia;
  • well managed social media accounts and a centralised website that can convey professionalism to the customer or client;
  • cohesive business operational systems offering general positive client experiences with the brand as a whole; and
  • the opportunity to be associated with positive customer feedback and experiences in relation to other franchise businesses in the network.

Despite the many benefits of being associated with a larger network, on the other hand, it is also worth noting that some brands may not have a high level of goodwill within the community. Without doing your due diligence and knowing how to identify good franchise brands, you may find yourself at a disadvantage by purchasing a franchise that does not have a strong brand association or a loyal customer/client base.

Industry Experience

An experienced entrepreneur with a greater understanding of the industry and business competition will undoubtedly establish a more profitable business than the aspirational entrepreneur. However, buying a franchise can often allow you the opportunity to leverage the industry experience of the franchisor by:

  • offering well-developed products and services in line with customer or client expectations;
  • providing the opportunity to be part of a network that prices competitively;
  • accessing lower prices when purchasing supplies by virtue of the franchisor’s industry connections or group buying power; 
  • providing the possibility for higher profit margins on products and services by virtue of lower-cost pricing; and
  • providing the possibility for benefiting from any product rebates that the franchisor may receive from a product supplier. 

Due Diligence on Any Franchise Business 

Regardless of the type of franchise business you are considering or the industry it belongs to, you should conduct due diligence to consider the risks you can foresee prior to buying the business. 

If you have expressed interest or submitted an application for a franchise opportunity, you are only at the journey’s beginning. This may mean you will have less access to detailed information about the business. However, as you progress through the franchisor’s assessment and recruitment processes, you will likely be provided with greater operational and financial data to evaluate. Where the business is an existing franchise, there will be information about the past performance of the business. 

Regardless of whether you are interested in purchasing a greenfield (new) or existing franchise, the same types of risks will be present to varying degrees. You can conduct your due diligence by assessing the commercial, financial and legal risks.

Commercial Risk

You should assess the commercial viability of a franchise. Carefully consider the information provided by the franchisor as to how the network is performing overall. Additionally, consider what sort of training or support frameworks exist to help you upskill when you join the business. This understanding is important whether you are buying a greenfield franchise or an existing franchise. It is particularly important if you are new to a particular industry or have prior experience in another business area.

Financial Risk

When assessing the financial risk of a franchise, there are two different approaches you can take. These will depend on whether you buy either a greenfield franchise or an existing franchise:

  1. greenfield franchise. This opportunity does not have data on past performance and historical sales, which means you should carefully consider the franchisor’s financial disclosure documents; or
  2. existing franchise. This opportunity does have data available that can demonstrate how the business has performed in the past. This means you should seek professional advice from your accountant to get the most out of this data.

Legal Risk

When assessing the legal risk of buying a franchise, a good place to start is to read the franchisee’s information statement. This is a fact sheet prepared by the ACCC to help the aspiring entrepreneur understand the reality that, for example, although franchises have a lower failure rate than other businesses, franchising is not risk-free. Giving a further example of the possible legal risks involved when buying a franchise, what happens after the initial period (or ‘term’) of the franchise agreement depends solely on the terms of your agreement with the franchisor. There is no guarantee you will be able to keep your franchise business at the end of the term. Usually, the franchisor will not grant you the option to renew the agreement indefinitely.

It is a good idea to having your franchise agreement and disclosure document reviewed by a lawyer. This will help you to understand your ongoing obligations to the franchisor during the time you operate the business. It will also provide an understanding of what happens at the end of the term when your franchise agreement ends.

If the franchisor has not provided a copy of the information statement to you, this can nevertheless be accessible on the ACCC website. Depending on whether you are buying either a greenfield franchise or an existing franchise, there are key franchise documents you can expect to receive.

Key Signs on Identifying Good Franchisors

Having considered all the pros and cons of buying a franchise, it becomes clear that not all franchises are equally well established. 

You can identify a ‘good franchisor’ by asking yourself a few of the following questions:

  • Have I had a positive customer/client experience in the past with one of the businesses that form part of the franchise network?
  • How did that experience compare with an experience I have had with a competitor?
  • Does the franchise have a high volume of positive Google reviews?
  • If the franchise does not have a high volume of positive Google reviews, do the negative reviews seem to be isolated to particular franchise locations only?
  • Have I seen any positive/negative publicity for the business brand?

If you have the opportunity to speak with existing franchisees, you should also make further enquiries of the following:

  • How much ongoing support do they typically receive from the franchisor each week?
  • Does the franchisor run regular meetings with franchisees?
  • Have there been any significant changes introduced to the franchise in recent years?
  • Has the franchisor continued to maintain relevance with their target market by developing new products or services?
  • Would they choose to ‘do it all again’, having experienced first-hand what it is like to interact with the franchisor and run their franchised business? 

Key Takeaways

Buying a franchise comes with a unique combination of commercial, financial and legal risks, compared to the risks associated with buying an independently branded business. Many franchisees will speak highly of the support frameworks and relative ease of operating their business by leveraging the established brand and systems of the franchise. These franchisees may then go on to acquire more territories within the same franchise, sell the business due to personal circumstances and go on to either buy a business with a similar franchise or a completely different franchise knowing the franchisor will offer them support and training. To discuss why to buy a franchise and maximise the likelihood of building your franchisee success, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page. 

Frequently Asked Questions

What are some benefits of buying a franchise?

When you buy a franchise it presents you with the opportunity to benefit from a proven business concept. Additionally, buying a franchise can often allow you the opportunity to leverage the industry experience of the franchisor.

What due diligence should I conduct before buying a franchise?

You should conduct due diligence to consider the commercial, financial and legal risks you can foresee prior to buying the business. 

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