Buying a Franchise - Why Buy a Franchise

Franchising in Australia is big business. According to the 2016 Franchising Australia survey, there are currently 1,160 Australian franchise systems and an estimated 79,000 franchise units in Australia, employing nearly 500,000 people and turning over approximately $146 billion in revenue annually. Australia has one of the highest rates of franchising in the world and our regulatory environment has evolved to reflect this. Territory Business Sales is a member of the Advantage Business Sales Network and our brokers have extensive experience with hundreds of different franchise brands throughout Australia. Appropriate, timely, professional advice is essential if you are looking to purchase a franchise. A few dollars invested for quality advice upfront can save hundreds of thousands later, in addition to ensuring that your new franchise maximises its prospects for success.

Franchising, when done properly, should offer some or all of the following advantages over independent businesses:

  • Significantly lower failure rate - ie a franchise business is significantly more likely to still be trading in 5 years than a non-franchise start up;
  • Strong branding – helps to attract clients;
  • Established marketing programs over multiple formats & media - generally leading to higher sales & revenue;
  • Structured training for new operators at the outset and ongoing business support - very important for first time business owners;
  • Proprietary technology, IT or products - often provide a genuine competitive advantage to competitors;
  • Proven business models that have demonstrated profitability in a range of trading environments and locations;
  • Economies of scale leading to lower purchase costs by leveraging group buying power;
  • Established supply chains as well as back up options;
  • Ongoing pipeline of new products and services with associated marketing programs;
  • Camaraderie arising from franchisee meetings – franchisees are same industry but not competitors, all with similar issues;
  • Franchises generally sell at a higher price than similar equivalent independent businesses;
  • Assistance with lease negotiations, especially with large corporate landlords;
  • Unique legal protections under the Australian Consumer Law and Franchising Code of Conduct;

 

What are the Downsides of Franchises?

The recent 2018 Senate Enquiry into Franchising exposed a number of concerning practices that have crept into the franchise industry over recent years. Despite the extensive media focus on these issues, they are largely confined to a select group of rogue operators – the majority of franchisees and franchisors enjoy a mutually beneficial commercial relationship. The expected outcome of the Senate Enquiry will be that much more severe penalties will be introduced along with a greatly enhanced investigative and prosecutorial presence of the industry regulator (ACCC). This should ensure that the poor behaviour exposed by the Enquiry is largely eliminated from the industry.

Other than the isolated elements above, there are a number of issues with franchises that will make them not suitable for everyone. Some of these include:

  • Franchise Fees – either a set fee or a percentage of total sales paid for the right to use the brand and operate the system to generate an income;
  • Lack of flexibility – Franchise system generally means you are restricted in what you sell, what you charge, how you present and operate;
  • Extra costs to enter into agreement – generally a few thousand dollars of legal fees associated with entering into the agreement;
  • More expensive to buy into – as above, franchises generally sell for a higher price point than an equivalent sized independent business;
  • Restrictions on exit – franchisors may try to restrict you from the industry or from your clients at the end of your agreement;
  • Agreement may have provisions for you to undertake actions that are not in your best interest – eg sell goods at a loss;
  • Agreement may be able to be unilaterally varied by the franchisor to their benefit;
  • Brand damage can cause harm to your local business – eg interstate food poisoning can harm your local sales through brand association;

How Can Territory Business Sales Assist with Your Franchise Purchase?

Territory Business Sales sells franchises on behalf of existing franchisees as well as new franchises (Greenfield – yet to trade) and company owned stores for franchisors. We welcome any enquiry on these businesses as part of our normal sales process.

In addition, we also offer a consultancy service for people looking to purchase a franchise either directly from a franchisor, through another broker or as a private sale. The correct advice in these cases can save you hundreds of thousands of dollars. Our consults generally cover some or all of the following topics:

  • Likely Fair Value range for the franchise (based on info we arrange for you to provide);
  • Franchise Pros & Cons as listed above, but related to the brand you are enquiring after;
  • Franchise agreement – what is negotiable and what is not;
  • Finance discussion – what is your likely borrowing capacity and actual budget;
  • Extra information you should collect as part of the Due Diligence process;
  • How do you undertake Due Diligence, who do you involve and when;
  • Key legal contacts with extensive industry experience to minimise your legal expenses as well as to help protect yourself;
  • Key industry benchmarks for these types of businesses and comparison with yours;
  • Discussion of the local & national economic environment, trading conditions and potential considerations moving forward.
  • Business and accounting support contacts to assist you moving forward;
  • Business structure options for you to proceed;
  • Outline of principal legal issues you will need to consider;
  • Advice with regards to negotiating the price.

 

Call us today, be informed and enter into your franchise relationship with the best prospects for success.