Pro’s and Cons of Franchising

Becoming a successful small business operator, and being your own boss, is an aspiration that holds great appeal – which for many Australians is realised through franchising.

In many ways, buying into a franchise improves the prospects of success for a fledgling business. But the costs can also be significantly greater than those involved in starting your own independent business. While the upfront franchise fee for some service-based franchises (like home cleaning or bookkeeping) can be relatively low, the initial cost can be well over half a million dollars for retail franchises once you add in the cost of shop fit outs, the nature of which are dictated by the franchisor.

In addition to the upfront investment, franchisees can expect to pay ongoing royalties and marketing fees to the franchisor, generally set as a percentage of turnover – and they can be hefty.

These costs however, haven't diminished the appeal of franchising. A survey by Griffith University entitled Franchising Australia 2006 indicates just how popular and economically significant franchising is, with its findings including:

· There are an estimated 70,000+ business outlets operating within a franchise system in Australia.
· Estimated total sales turnover for 2005 from the franchising sector was $128 billion. This represents some 14% of the national GDP of Australia.
· There are around 960 franchise systems to choose from in Australia, an increase of 12.9% since the previous 2004 survey.

 

Such wide choice of available franchise systems is a good thing, but it is important for any would-be franchisees to select carefully.

“Buying a franchise is a major decision. The commitment in capital and borrowings can be significant”, said Richard Evans, CEO of The Franchise Council of Australia. “A new entry into the sector needs to consider the process very carefully. Franchising is not a guarantee for success, rather it is an opportunity to establish a healthy, rewarding business with the support of a network focused on success.

“As with any business there are risks involved, but they are reduced if you research effectively”.

There is no shortage of information either on the web or from various franchise organisations about the selection of franchises available. There are even dedicated franchising magazines. However a very useful first port of call is the Franchise Council of Australia’s website, www.franchise.org.au.

One of the great risks with owning and operating any business, particularly in the early years, is the possibility of its failure. Estimates vary widely, with some being as high as around a 60% failure rate for new businesses in the first five years. This is one of the areas where franchising can be advantageous for people entering small business.

According to the Franchising Australia 2006 survey, “Fewer than 2% of franchised units ceased to operate (in 2005), supporting the notion that franchising failure rates are low.  In addition, franchisees remain in the system for an average of seven years, indicating that their businesses are operating profitably”. 

Before you select a franchise, it pays to have a clear idea of what will be involved. Baby boomers in particular who are keen to embrace the option of running their own business may be surprised at the sheer hard work involved – even when the venture comes with the proven track record of a franchise. And if you're the creative type with plenty of independent ideas for your business, you may feel restricted by the strict trading conditions often imposed by franchisors.

Irrespective of the type of franchise system you are interested in, the only way to be sure of what you are buying into is to review the franchise document carefully, and have it checked by your accountant or solicitor.  Above all, speak to existing franchisees to see what sort of support you can expect, whether the franchise lives up to their expectations and to find out some of the pitfalls involved. No professional franchisor will have a problem with you doing this. Indeed, if you encounter a franchisor that shows any resistance to this idea, move on and explore a different business option.

Published: 10 December 2007

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