How to franchise a business in Australia
If you are looking at how to franchise a business, the following information will help you.
Why franchise a business? Franchising a business can be a very fruitful way of expanding a successful existing business. Many well-known brands such as McDonalds, Domino’s Pizza, have used franchising to finance and accelerate their growth from local businesses into leading global brands, whilst other Australian home grown franchises such as Eagle Boys Pizza have used franchising to become a household name throughout Australia.
Australia is the most-franchised nation (per head of population) in the world; this means that awareness to franchising is at an all time high. Many individuals and organisations with existing businesses therefore see franchising as an easy route for expanding their business and getting rich quick. You will also be amazed by how many people ask us for help to franchise an idea they have!
Franchising is not a testing ground for a brand new business idea. You need to be running a successful business before you can consider going down the franchise route.
Once you have a successful business and want to look at franchising it, you still need to deem if your business is franchiseable and then if so, you will need to look at how to set it up properly at a franchise. Australia also has some of the world's most stringent franchising legislation which means there is little or no margin for error for "new" franchisors. Let’s look now at how to identify if your business can be franchised.
Though most business concepts can be franchised, there are some that are not suited to franchising. A “franchiseable” business in Australia would need to be:
- Credible – your concept needs to be proven with a good track record and an experienced management team. It needs to have good local press and public acclaim.
- Profitable – franchising is not a means of rescuing a business that is under-performing, a business needs to be already successful and generating a sufficient gross profit margin to allow you and your franchisees to make money.<
- Unique – your business needs to have a unique selling point that will allow it to be differentiated from competitors. This sustainable competitive advantage would allow it to compete successfully in the Australian national and local markets, with possible potential to expand internationally.
- Transferable – you need to have a business where the systems, procedures, expertise, skills and know-how can be transferred to others.
- Teachable – you need to make sure all the systems are in place and the operating systems of the concept documented in manual form. You should also be able to train others in three months or less in the use of your systems and procedures.
- Supporting – you need to have or be able to acquire the ability to provide ongoing support to your franchisees.
- Affordable – if the franchise is very expensive there will be very few people who could afford to buy into your network.
What are the benefits to franchising my business?
- Highly motivated, hard-working individuals – As it’s also the franchisee’s capital and future that is at risk, it’s in their interest to maximise growth and profitability and to ultimately give 100% to the business. It’s unlikely that an employee with no financial stake in the business would give the same commitment.
- Lower overheads – capital is always scarce in growing a business, but by going down the franchise route, the capital needed to expand your business is provided by the franchisee. This means that you will incur lower overheads than you would if they set up a branch network.
- Building the brand – as your franchise grows, so does the visibility of your brand. Through franchising you can turn a local Australian brand into a national and even global brand name. Often a local franchisee will be more acceptable to the local community, which will help with the perception of your business as a national name with local roots.
- Regular revenue – the ongoing fees your franchisees pay will develop to be a significant revenue generator for you.
- Maximum profits – there is no other way to grow as rapidly as franchising allows and maximum profits are achieved by getting very large. Due to the few impediments to growing a business through franchising 1000s of franchise outlets can be set up nationally in Australia or worldwide. No other business model can offer this.
- Greater buying power – franchisors tend to buy for the entire system, and due to the large number of franchise units that can make up a franchise system, the franchisees will reap the savings that the franchisor makes. This enhances profit margins and gives the franchisees a strong advantage over all competitors.
- Securing locations –as a franchising system grows, its image and reputation tends to grow accordingly. Landlords looking for tenants are more likely to want to rent to those companies that he/she regards as successful as its a secure rent for them, and also well-known, as it can enhance the overall profile of shopping centre, street etc.
- Market dominance – by growing rapidly, franchises tend to locate many units in a given market and essentially push out the competition. Extensive advertising can also be undertaken in a given location as the cost is spread amongst the units, again giving the franchise an edge over local competition.
- International expansion – franchising is an ideal route to develop your business overseas. By working with a local business or individual you can take advantage of their knowledge of the marketplace.
What are the disadvantages to franchising a business?
- Costs involved – you need to be realistic about the cost of establishing a franchise network in Australia against the time it will take for you to see a return on your investment and ask yourself if you can afford it.
- Loss of control – Usually when you own it, you control it, but in franchising it is the franchisee that controls his/her unit and to a degree runs it their way. It’s here when the operating manual comes into play, if the franchisee sticks to your systems then it’s as if you are running the franchise unit yourself. Remember that each franchisee is a businessperson in their own right and so you do not have “hire and fire” rights over them. You do however need to monitor closely what the business is achieving and identify areas of poor performance.
You need to have regular communication to make sure that the franchisee is doing things properly and sticking to your systems and procedures to meet their targets. A potential failure can have disastrous results for the network as a whole.
You need to also protect your business from franchisees who may try and replicate the concept and steal customers/clients.
- Finding the Right Franchisees – it can be tempting in the early stages to simply recruit those with the required investment to help get your franchise up and running. This can be fatal as the wrong franchisees can damage the foundations of your franchise and bring failure to the whole network. You need to therefore invest time and money in recruiting methods and how to identify franchisees who are highly motivated with the potential to be successful.
- Managing Growth – having a large franchise network can be a nice position to be in, but you need to make sure that you have the required support staff to serve the needs of your franchisees. It is therefore better to be over-staffed at times so that you can react to any problems that may arise from old and new franchisees, this may involve changing the culture of your organisation to one that is support-oriented. If they don’t get the necessary support they may find it difficult to achieve their aims and your business could suffer.
- Conflict Between Franchisee and Franchisor – The biggest negatives in franchising are the conflicts between the franchisee and franchisor which as a worst-case scenario, but not uncommon, can lead to legal proceedings. When franchisees are making money they are happy, but if they are not then the blame usually lies at the door of the franchisor. Allegations, rightly or wrongly, include lack of support, inadequate training, territorial problems, misrepresentation and even fraud. Frequent communication, adequate support, thorough market research and comprehensive operations manual can help combat this.
What steps do I need to take to franchise my business?
Having a concept that has been working well over a period of time, as a business in its own right in Australia is the first step to a successful franchise. You should be able to understand how the business operates and what systems, procedures, expertise etc you need to transfer to or being to train a franchisee in. It will have also given you enough time to get your market research right and correct any problems and issues that may have arisen.
- Understanding your business – You need to prepare a business plan for franchising. This will look at issues such as the structure of the franchise, franchisee profile, Australian territories that can be allocated to franchisees, staffing resources and your proposed franchisee support system.
How will the franchise opportunity work? What is the role of your business and what should the franchisee be responsible for? Asking these questions will help you to establish some operating guidelines for your franchise. If you are going to train other people to run your business you need to know what you should be training them on. What comes naturally to you may not be as obvious to a new franchisee.
Following this you can start looking at the kind of Package you will give to a franchisee. A full financial analysis will be needed, to allow you to put together financial projections for both your own business and that of the franchisee. These should look at how sales build up over time, profit margins, cost profiles and the management service fees you might charge a franchisee. You should also look at the cash flow of the business and consider the effect of “what ifs”.
What you manually record forms the basis of your operations manual.
- Pilot operation – although you are already running an established business in Australia, you need to be certain that it will operate at “arm’s length” i.e. test out your concept as a franchise. You therefore need to set up a pilot operation, which can be one or several outlets. The purpose of this will be to make sure that the business can be run as a franchise, and that issues flagged up are addressed, e.g. if the training you provide is adequate and you can provide the necessary support, etc. You will need to adjust your operations manual to address any issues that arise.
- Ongoing pilot – a good way of monitoring and reacting to changes in the market place is to set up an in-house operation that does the same as a franchised operation. That way you can see what developments will affect your franchisees and how they should be responding to them. It can also be used to pilot new ideas before they are implemented across the network.
- Operations manual – you will need to prepare a Franchise Operations Manual that sets out a detailed explanation of the business system and how it is to be operated, this is the blueprint for how a franchisee should run their business. Numerous references to the Manual are usually made in the Franchise Agreement. This is a time consuming task that should not be underestimated!
The Manual is used for the following purposes:
- As a day-to-day reference tool for use by the franchisee and his/her employees when running the business.
- As a training tool by you when training franchisees.
- As a training tool by the franchisee to train employees.
- It forms a basis for business development.
For a newly franchised business, it is acceptable to develop the Operational Manual gradually as new systems are developed and procedures are improved through operational experience. Usually, the Franchise is piloted over 12 to 18 months, so the manual may be developed as a Pilot Edition. Once the Franchisor is satisfied that the systems and procedures work in practice, rather than theory, then the Pilot Edition can be amended and published as a full First Edition. You must ensure that the manual is also regularly updated.
- Franchise agreement – this is what governs the relationship between you and your franchisees, and is an important source of protection for your business. It should include – length of agreement, rights of renewal, obligations of both parties, termination provisions and what happens in the event of illness, death or incapacity of the franchisee. You should make sure that you use a lawyer who specialises in franchising, check out lawyers who are members of the Australian Franchise Council.
- Who are you looking for? – It is good franchisees that help build the success of your business, and equally getting the wrong ones can bring it down. Remember you will be investing in these franchisees and will depend on them to help you grow your business. So choosing the right franchisees is vital, none more so than in the early stages as it’s the initial franchisees that form the backbone of your franchise. You need to identify what skills, experience and characteristics you expect them to possess and build a profile on this.
- Training – you need to decide on what training is required for your franchisees, how long it will last, where it will be held and who will train them.
- Investment costs – you need to set the amount of the initial fee and what the ongoing payments will be. The initial fee should not contain a significant profit element, as your return will come mainly from ongoing fees, which will increase with franchisee performance.
- Finding franchisees – there are numerous ways of doing this – franchise websites, franchise magazines, national newspapers that carry franchise features and franchise exhibitions. You should also look at the business start-up market in Australia as this is abundant with people looking to start up in business for themselves but not sure of what avenue to take – franchising will be ideal for many of them. To support your recruitment of franchisees you will need to create relevant franchise literature that outlines the structure and nature of your franchise and what’s involved in becoming one of your franchisees.
- Management and support staff – your franchise management team will play a key role in your network. They are usually responsible for selecting franchisees and providing the ongoing support. The support staff will be responsible for monitoring performance and reporting, carrying out credit control and providing technical advice for franchisees. As key staff members that you will rely on to recruit, manage and support your franchisees, you need to ensure that you get the best people for the job and have sufficient coverage.
What professional advice should I seek?
Franchise consultant – using a good franchise consultant will bring an extra perspective to your business as well as a solid understanding of franchising. They will initially help you to identify if franchising is right for you and if so how will advise you on developing your system as a franchise.
Generally the services offered by franchise consultants are
- Help with feasibility studies
- Franchisor operating manuals
- Help with business plans.
- Advice on funding
When finding a consultant look at a few, initially those who are Australian Franchise Council members or who specialise in franchising in Australia, and from asking about their existing and previous clients, including those they recommended didn’t take the franchise route, you will get a good idea of who will be best for your business.
Accountants – your own accountant should be able to help you with your financial planning, including your business plans and guidance for franchisees on what they should be achieving from their business.
Solicitors – it is essential that you take legal advice, and should seriously consider using a lawyer that specialises in franchising. The Australian Franchise Council has several law firms as members. The lawyer will help you prepare a comprehensive agreement and you may need advice on registering your trade and service marks. By using a specialist lawyer it will increase your brand value and will give you and your franchisees greater protection.