Five advantages to becoming a franchisee
When you decide to become a business owner, there are a few options you can choose to pursue that goal. You can start your own business from scratch, buy an existing independent business, or buy a franchise.
Your original motivation for becoming a business owner will be a key factor affecting which option you choose and there are many pros and cons associated with each option.
However business format franchising is a very successful and rapidly growing way of doing business in Australia, with 1,180 franchise systems established and total franchisee numbers growing 8% each year, indicating more and more start-up business owners are choosing franchising over independently owned businesses.
Here are my top five advantages of choosing franchising:
1. Proven business and results
Established and recognised franchise systems are by their very nature less risky than starting up your own business.
The business format franchise uses a comprehensive system for the conduct of the business, which includes elements such as business planning, management system, quality of goods, location, image and appearance. Standardisation, consistency and uniformity across all aspects are hallmarks of the business format franchise.
Franchise businesses bring the added benefit of generally being proven several times over by different franchisees. Generally the franchisor has tried and tested different approaches to get the best results.
You should take advantage of this information and ask to see example financial results of the best, worst and average performance of franchisees in the group, to have a clear understanding of what you can actually expect to achieve. While it isn’t a guarantee that you can expect the exact same results in your chosen territory or location, it is real information you can use in your decision-making, planning and to obtain any crucial funding you might need.
Some franchise groups also have accreditation with banks that smooths the path to obtaining those funds. Other groups also guarantee a level of income while you establish your site and start building a consistent revenue stream.
Establishing your own business from scratch is a riskier premise, as your product, service and business model are unproven.
Many business owners have overly optimistic expectations about the market’s response to their offering, costs to bring it to the market, anticipated financial results and timeframe to see them come to fruition. The reality may be somewhat different to those expectations.
Starting your own business means you need to decide and develop your brand and create awareness of it in the market. Building and maintaining this, takes time.
Most established franchise systems have well-recognised and established brands, making it easier for the franchisee to get started and grow successfully. Recent statistics show that franchise groups are 30% quicker to become cashflow positive and on average experience double the success rate when compared to independent small businesses in terms of growth and failure rates.
Given that the median number of franchisees per franchise group across Australia is 22, it’s not hard to see why. Those franchisees are hard at work making the product and service known and accepted by the market and building the benefit of consistency, which can be leveraged by incoming franchisees.
As part of the franchise arrangement, most franchisees are also required to contribute to a central marketing fund. Ongoing marketing activities are often delivered by the franchisor, allowing the franchisee to gain benefit from coordinated and widespread marketing campaigns.
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3. Training and Support
Training and support is a key feature of franchise groups both at the outset when a new franchisee comes on board and ongoing throughout the life of the relationship.
According to the Franchise Australia 2012 report, 99% of franchisors in Australia provide training and support to franchisees to develop their business management skills and expertise, and over 70% provide training and updates to support franchisee employees.
This ensures franchisees maintain any required licenses, current knowledge and processes and can efficiently train new staff they employ.
Franchises also provide an excellent ‘in-built’ support group for franchisees, with more than 70% having 10 or more franchisees in their group.
A support network of existing franchisees that have trod the path before you is hugely beneficial to new and prospective franchisees.
Prospective franchisees should speak to existing franchisees to gain insights into their journey and experience, learn from their mistakes and capitalise on the activities they find produce the best results.
Many franchisors also employ Franchise Support Managers whose role is to provide assistance to franchisees throughout their journey.
Franchise groups also provide information about ongoing performance that you can use to set yourself targets and benchmark yourself against, as motivation once you are established.
Unlike independently owned businesses, franchises are tightly controlled by the franchise agreement and the franchisor. The agreements are legally binding documents that spell out your obligations and right to operate the franchise for a specified period of time.
Given the average tenure of a franchisee is only six to seven years, if you intend to operate your business for longer than that, you may need to factor it into your initial discussions with the franchisor.
Franchise agreements also typically define:
- the territory you can operate and source customers from;
- intellectual property rights and ownership and licence to use them during the life of the agreement;
- operating procedures you must follow and standards you must meet;
- purchase of goods and suppliers you must source them from;
- ongoing expenses such as renewal fees and royalties, marketing contributions, training costs or refits;
- ownership of property or lease arrangements entered into; and
- obligations upon termination and costs associated with selling the franchise.
While franchisees are bound by their agreement, they have the benefit of a clear path to sale and an expectation of the price they can expect to receive for their interest, as well as any costs they will have to meet.
Because of the nature of a franchise business with systems, support and recognition, a franchise is typically easier to find potential buyers for as well, and franchisors often buy back franchise sites or have buyers lined up for an outgoing franchisee.
Independent owners on the other hand typically have no real idea about the value of their business and what a realistic asking price is for the sale of it.
Or worse, think it’s worth more that the market is prepared to pay and only discover the shortfall when they make the decision to sell or are forced to exit for unforseen reasons. By then, it’s too late to work on a strategy to increase the business value that will give them full return on investment that their time, effort and sweat equity deserves.
When starting or buying your business, weigh up these and the other pros and cons of your options to make sure you invest in a business that provides you with the experience and return you want.
Marc Peskett is a partner of MPR Group a Melbourne based firm that provides business advisory and finance lending services, as well as tax, outsourced accounting and grants support to fast growing small to medium enterprises.
MPR Group provide advisory services to assist business owners buying, selling and starting a new business, including specialist services to assess franchising opportunities, obtain funding and manage franchises. For a free initial discussion contact MPR Group by clicking here.
You can follow Marc on Twitter @mpeskett