The franchise business model has many advantages for a prospective franchisee, including access to an established brand name, and business support from the franchisor. These advantages are assets to a business operator whether you are an existing business owner or looking to start your first venture.
If you are considering whether to start a new franchise, make sure you give some thought to the tips we have set out below.
1. Do your research
Before you make any investment in a franchise, you should be properly informed about the franchise itself, as well as the market that it is operating within.
Ideally, you would have some experience working within the relevant industry. However, you can also better inform yourself by speaking with current and former franchisees to hear their experience of operating within the network, and by carrying out your own research via the internet.
If franchisors allow a walk-through of their Manual before entering into franchise documents, do it! And if not, pressure test them on what is included – a good franchise system will have robust policies, procedures, and tools to help you in the operation of the franchised business.
2. Read the disclosure document
It is mandatory in Australia for any prospective franchisee to be provided with a disclosure document by the franchisor. This document will contain most of the key information relating to the franchise network.
Some of the key details to look out for are:
- Territory: Whether you will be granted an exclusive area in which other franchisees within the network cannot operate, and the franchisors policy for determining that area (if applicable).
- Fees: The ongoing and any potential one-off costs payable to the franchisor and third parties.
- Supplier Restrictions: Whether you will be free to purchase goods and services at your discretion, or whether you will be required to use the franchisor’s preferred suppliers.
- Recent history: How may franchised businesses have been terminated, closed down or sold in the last few years – if there is a pattern of closures, is there a reasonable explanation?
3. Have your franchise agreement reviewed by a lawyer
Generally, the franchise agreement will be issued to you together with the disclosure document in the form it is to be signed in i.e. including your details and any terms specific to you. This agreement is crucial, as it will effectively govern your ongoing relationship with the franchisor and may contain terms different from the standard position set out in the disclosure document.
Once you are provided with this document, it is in your best interest to seek the advice of someone who is familiar with the franchising legislative framework and who is aware of the current terms being offered to other participants in the market.
Some of the key advantages that a lawyer’s review can offer are:
- Flag any provisions that could create significant problems for your business down the track.
- Assist in negotiating any terms that may not be “to market”, or that can be adjusted in your favour.
- Suggest relevant amendments where the agreement may be non-compliant with any relevant laws or regulations.
4. Consider your financial position
Investing in a franchise is a significant financial decision. As such, you should ensure that you have made proper allowances in your finances for the costs that may flow from it.
A franchised business will have additional costs that do not have to be considered in the traditional business model. These include annual fees payable to the franchisor, as well as potential restrictions on where you are able to purchase your inventory (as discussed above).
If you are unsure about your capacity to take on these costs, we suggest that you seek the advice of an accountant with relevant industry experience.
If you are considering starting a franchise, or if this article has raised any questions for you, please get in touch with our team for a complementary initial consultation.