Franchises Make for Great Opportunities for Those Looking to Buy a Business in Australia, But Before You Sign on the Dotted Line, Know This
More and more people in Australia and across the globe are opting for buying franchise businesses, which allows them to bypass the lengthy start-up phase and subsequent uncertainty that comes with traditional business ventures.
And, because franchise opportunities provide more support and come with a track record that allows interested buyers to truly know what they are getting into before they up any money or sign o the dotted line, more and more entrepreneurs are opting for the franchise route.
As they are finding, buying a franchise does, however, come with its own unique costs, all related to obtaining the right to use the franchisor's name and its assistance.
If you are considering buying a franchise in Australia, you will want to makes sure you are familiar with some of the more common franchise costs, which include:
Initial Franchise Fee and Related Expenses
The initial franchise fee, which may be non-refundable, may cost several thousand to several hundred thousand dollars. Of course, franchise purchases may also incur significant costs to rent, build, and equip an outlet and to purchase initial inventory.
Other costs include operating licenses and insurance, with many franchise purchasers also required to pay a "grand opening" fee to the franchisor to promote the new business or franchise outlet.
Continuing Royalty Payments
Individuals who purchase franchise opportunities may have to pay the franchisor royalties based on a percentage of the weekly or monthly gross income. In fact, franchise owners often must pay royalties even if their franchise outlet has not earned significant income during that time.
In addition, royalties usually are paid for the right to use the franchisor's name. So even if the franchisor fails to provide promised support services, a franchise owner may still have to pay royalties for the duration of your franchise agreement.
Advertising Fees
Many franchise owners also have to pay into an advertising fund. Some portion of the advertising fees may go for national advertising or to attract new franchise owners, but not to target the franchise owner’s individual outlet.
Additional Franchise “Controls”
To ensure uniformity, franchisors typically control how franchisees conduct business. These controls may significantly restrict your ability to exercise your own business judgment. The following are typical examples of such controls:
Site Approval
Many franchisors pre-approve sites for outlets. This may increase the likelihood that a new franchise will attract customers, as franchisors usually have a better idea about what will work and what will not, especially when it comes to their franchise business. This can be frustrating when a franchisor does not approve the site a franchise buyer wants, but is generally in the best interest of the future franchise outlet.
Site Design
Franchisors may impose design or appearance standards to maintain brand awareness and to ensure customers receive the same quality of goods and services in each outlet. Some franchisors require periodic renovations or seasonal design changes. Complying with these standards may increase a new franchise owners start-up costs and long-term costs.
Restrictions on Products, Services Sold
Franchisors may restrict the goods and services offered for sale. For example, as a restaurant franchise owner, a franchisee may not be able to add their own menu items or remove an item from a menu because it is not selling well in that particular market.
Similarly, an automobile transmission repair franchise owner may not be able to perform other types of automotive work, such as brake or electrical system repairs.
Restrictions on Operations
Franchisors may require that a franchise owner operate the franchise outlet in a particular or pre-specified manner. The franchisor might the franchise owner to operate during only during certain hours, use only pre-approved signs, employee uniforms, and advertisements, or abide by certain accounting or bookkeeping procedures.
While these restrictions may impede the franchise purchaser from operating their outlet as they feel or believe is best, it does keep the practices the same across the board, which is paramount with most large franchises or chain businesses.
The franchisor also may require the new franchise owner to purchase supplies only from an approved supplier, even if similar goods can be purchased elsewhere at a lower cost. Once again, this guarantees that the product the customer receives is of the same quality at all franchise outlets.
Restrictions on Sales Area
Franchisors may limit franchise purchasers to conducting business or opening their outlet to a specific territory only. While these territorial restrictions may ensure that other franchisees do not compete within the same market for the same clientele, it may also limit franchise owners to expanding only in certain areas, prevent the opening of additional outlets, or put a stop to moving to a more profitable location.
Also Noteworthy
Franchise buyers may also lose the right to their franchise if they breach the franchise contract. In addition, the franchise contract is for a limited time; there is no guarantee that a franchise purchaser will be able to renew it.
This explains why you will want to have your own legal assistance. Sure, the franchise will have a solid legal team behind them, and you will more than likely have some access to this legal team’s services and expertise. Still, you will want to have someone whose main goal is to protect you and your best interest, which calls for individual representation both legally and financially.
In short, if you buy a franchise, you will find it in your best interest to have your own attorney and your own accountant on your business team.
You will want to talk to your attorney about the fact that a franchisor can end your franchise agreement if, for example, you fail to pay royalties or abide by performance standards and sales restrictions. If your franchise is terminated, you may lose your investment.
Because of this, follow the rules and regulations outlined in your contract and ask your attorney about anything that you are unsure about.
Lastly, most franchise agreements typically run for 15 to 20 years. After that time, the franchisor may decline to renew a franchise owners contract. This is something you will want to be aware of going in and discuss at length with your attorney and accountant before signing an agreement with any franchise.
And, because renewals may not provide the original terms and conditions, your attorney will be needed to carefully review any renewal agreement on your behalf because the franchisor may raise the royalty payments or impose new design standards and sales restrictions that impact your bottom-line.
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