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;

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

Conduct your own research through the internet and also speak to as many current and previous franchisees as possible.

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 our Supplier 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?</td?
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.

Frequently Asked Questions

Are there any laws to regulate franchising, and if so, what are they?

Franchising in Australia has been regulated by the Franchising Code of Conduct since July 1, 1998, which is administered through the Australian Competition and Consumer Commission (ACCC).

The Code provides for a number of franchisee protection mechanisms including:

Mandatory disclosure of information from the franchisor, including financial details, directors’ interests, franchisee list, and litigation information;
Seven-day cooling-off period after signing the contract;
Recourse to mediation in the event of a dispute;
Free association of franchisees;
And others.

A prospective franchisee should read the Code prior to buying a franchise in order to understand their rights.

Do I need a licence to become a franchisee?

There is no specific licence required to become a franchisee.

However, some franchise systems may perform tasks or duties, which in themselves require special licences or permits.

These licences or permits may be obtained via the franchisor, or by direct application to the appropriate licensing body (usually local, state or federal government departments).

How can I tell if a business is a franchise?

There is really only one way to find out if a business is a franchise – ask! Search the Franchise Directory component of this website, or, if the business appears to be part of a chain, ask the local store operator, or contact the state or national office. You can also review the Franchise Council of Australia Member’s List. If the name of the franchise you are looking for does not appear here, check with your local FCA office in case they are in the process of applying. The Franchise Council recommends that potential franchisees ensure they deal only with members of the Franchise Council.

How do I know I am dealing with a reputable franchisor?

Potential franchisees should always ask for proof of membership of the Franchise Council of Australia (FCA), when dealing with franchisors. The Franchise Council of Australia is committed to best practice in franchising, and encourages all franchisors to aspire to the highest possible standards of franchising conduct. A list of members appears on this site. If a franchise system you are interested in does not appear on this list but states they are a member, check with your local FCA office

How long does a franchise last?

The period, or term, granted under a franchise agreeement will vary from one franchise system to another. Franchise terms may be as short as one year, or at the other end of the scale may be granted in perpetuity. Generally however, most franchises are granted for three or five year terms with an option to renew for a corresponding period. Individual franchisees who wish to exit their business generally need not wait until their franchise term is completed, and can sell the business at any point during the franchise in most cases. On the renewal of a franchise agreement, the franchisor is again required to provide disclosure information, and franchisees should again obtain legal advice, especially if there are changes to the franchise agreement for the renewal.

How much does a franchise cost?

Prices for franchises vary greatly from one franchise system to another, and even within franchise systems themselves. Service franchises, which mostly do not require fixed shopfront locations, and can be operated on a mobile basis, usually from home, may cost from $5,000 to $50,000. Retail franchises, which mostly require a fixed shopfront, shopfittings, stock, etc, may cost anywhere from $50,000 to $250,000 or more. Prices vary according to the size, scope and complexity of the franchise on offer, the amount of technical expertise and/or equipment required to run the business, and the amount of stock required, among other factors. Existing franchise businesses for sale may not be the same price as new franchises for sale. Factors such as goodwill, depreciation of equipment and fittings, stock levels, and lease terms may also come into play.

How much money will I need to borrow?

This really depends on the establishment cost of the franchise, and your estimated working capital for your first three to twelve months of business. Borrowing to buy a franchise is now fairly specialised, and can be quite different to borrowing to buy a stand-alone small business. A number of financial institutions offer franchise business loans where the franchise system itself may be taken into account as factor in the loan application, potentially reducing the amount of real estate security required, or reducing the interest on the loan. For more information about borrowing to buy a franchise, see the Franchise Directory.

Should I talk to other franchisees?

Absolutely. A list of franchisees should be included as part of the disclosure information franchisors must provide by law. Contact several franchisees, especially those who are in locations near the one you are considering. Introduce yourself, be brief and respectful of their time as they still have businesses to run. Use your own judgement about the information that is provided, and bear in mind that should you proceed, these franchisees may well be your future colleagues.

What are fees and royalties?

The terms are often used to mean different things by different people. A fee can include the up-front amount paid to the franchisor for the use of their name, know-how, operating systems, etc. This is one component of the overall start-up cost of a new franchise. Ongoing fees (or royalties) are usually paid to the franchisor for providing ongoing business, management and technical support, etc. This fee may be fixed as a percentage of the franchisee’s turnover, which may vary as trading conditions change. Alternatively, a flat fee may be levied every month irrespective of turnover. No two franchise systems may have the same fee structure, and some may use a combination of fixed and flat. Fees are most often paid monthly from the franchisee to the franchisor. In addition to the management fees levied by a franchisor, franchisees may also be required to pay into a central advertising or marketing fund, and this may also be done on the basis of percentage or flat contributions on a weekly, monthly or quarterly basis.

What happens if I have a dispute with my franchisor?

If you have a dispute with your franchisor, you need to identify the underlying issues behind the dispute and attempt to resolve these by mediation. Disputes may occur from a misunderstanding of an aspect of the franchise relationship, which is outlined upfront in the franchise agreement. Franchisees and franchisors join together in a commercial marriage in which both become stakeholders in each other’s businesses and future commercial success. Under the Code, disputes should be settled by mediation, using a mutally agreed third party as a mediator, if no agreement can be reached by direct negotiation. In most cases this will result in a mutually acceptable compromise to solve the problem, and enable the relationship to continue. If you are in a franchising dispute, the Australian Small Business and Family Enterprise Ombudsman can provide free support including information on the Franchising Code of Conduct, options to resolve your dispute and access to mediation services. The Franchising Code of Conduct is a mandatory code that applies to all businesses involved in a franchise agreement. The Code also describes the behaviours expected of franchisees and franchisors and includes a process for managing disputes. The Code states that parties must act in good faith. This means parties must act honestly, and not arbitrarily, with each other and cooperate to resolve the dispute.

What is a franchise agreement?

The franchise agreement is the contract which joins you and the franchisor in business together. Franchise agreements can vary in length depending on the complexity of the business. They outline the rights and obligations of the franchisee and the franchisor under the franchise arrangement. Franchising is successful because a “business formula” is developed and tested by the franchisor before being franchised. It is important therefore that the franchise agreement allows the franchisor to protect that “formula”, while at the same time providing for future innovation and development. For this reason, the franchise agreement may appear to be in favour of the franchisor. It is essential to obtain qualified and experienced legal advice before signing any franchise agreement. It is also recommended that any potential franchisee who is considering investing their life’s savings into a franchise business should also read the agreement themselves (in addition to their lawyer) to gain a better insight into the nature of their future franchise relationship. See the Franchise Directory for a list of legal advisors.

What is the best franchise for me?

Franchises are like clothes – what you like may not be to everyone’s taste and vice versa. Different individuals have different likes and dislikes, which is why buying a franchise is very much a lifestyle decision. The franchise that you choose should be consistent with your current or chosen lifestyle, and this should be among your primary considerations (along with price, location, growth potential, etc), when buying a franchise. Your business choice should be discussed carefully with your immediate family, particularly if your decision may have an impact on them. In the end, only you can make the decision on what is the best franchise for you, and the process that you apply to this and the relative importance you attach to the variables involved will be unique to your situation alone.

Where can I find out more information?

The Franchise Council of Australia publishes and sells several books on franchising which are recommended reading for anyone looking to buy a franchise. To find out more about these publications and to purchase online, please visit the publications section of this website.

Where do I go for advice?

In the course of buying a franchise, you will need specialised legal, financial and accounting advice that can only be provided by firms or individuals with extensive franchising experience. A list of these appear in the Franchise Directory. The FCA run many seminars and workshops around Australia, and these are also very useful to learn more about specific aspects of franchising. For a list of events and locations, click here.