Guide to buying a franchise
This guide will take you step-by-step on how to buy a franchise in Australia. The diagram below shows the steps; with each step described in this article in greater detail.
The information provided in this guide should not be used in isolation but instead researched in conjunction with the other information and advice we have on the site.
How to buy a franchise – the steps
Am I suited to going into business by myself?
Before you go further down the franchise route, you need to identify if you are right for going into business for yourself via the franchise route. You need to ask yourself the following questions:
- Can I give 100% and work all the hours I need to make the franchise a success?
- Can I handle the responsibilities involved in running my own franchise business?
- Will I be willing to do any jobs in the business no matter how big or small they are?
- Am I healthy and able to work hard and commit myself to the long hours I need to?
- Can I address and overcome the negative thoughts that go with being in business for yourself e.g. can I risk investing my hard earned cash into a business? And would my family support me throughout the business, even if it means me working weekends and evenings and having no holidays for a while?
Though the risks associated with buying a franchise are usually less than those associated with starting up on your own, risks in franchising still do exist. Even if you are buying into an ethical franchise opportunity, you should still be aware that things can still go wrong.
We don’t want to scare you out of buying a franchise, we just want you to be sure that you are doing the right thing and investing wisely. You therefore need to be aware that whatever you invest in the franchise business could be at risk, which means that if you borrow money you may be left with debts to repay.
You therefore need to be extremely comfortable with how much of your own money you invest including how much you borrow. You need to ask yourself:
- Do I have savings that I want to invest?
- Do I have any capital invested in property or elsewhere?
- Am I able to borrow money to invest?
Read more on “financing a franchise”
Though we have mentioned that franchising is not without risk, we should stress that if you do your research properly and find an ethical franchise that is right for you and has sustainability, then you could be very successful, like the other thousands of franchisees there are in Australia.
The following sections will help guide you through your franchise research process.
Research franchising as an option
Starting your franchise business is not easy, but in most cases it is a lot easier than starting a business from scratch.
When you buy a franchise you are buying into a tried and tested system. You are paying for the know-how, expertise and experience that the franchisor has put into the business. Any mistakes that were made were made by the franchisor when they set up the pilot franchise; they have made the mistakes in the past so that you won’t now.
You also get to see the potential of the business through other franchisees and the franchisor, before having to invest a cent.
You can research franchising by doing the following:
Search franchising online – There are many franchise websites in Australia, such as whichfranchise Australia, that specialise in franchising. As it is very rare that you get anything in life for free, take full advantage of all the free information and services these franchise websites offer.There is lots of free advice on whichfranchise Australia. Visit our “all about franchising” section to read it for yourself
Read franchise press – read specialist franchise magazines and literature available as it is an ideal way to familiarise yourself with the franchise industry in Australia. It will give you an idea of the different types of franchises available and as a result, what you may like doing.
Attend a franchise seminar – visit the Franchise Council of Australia website to see what franchise seminars are taking place near; these are usually run throughout Australia. Franchise seminars usually take place over a full day giving you the chance to hear franchisors and franchisees speak about their experiences in franchising, as well as financial and legal experts who will tell you about raising finance and the legal issues you should be aware of. You will also get the opportunity to put your questions to the experts.
Attend a franchise exhibition – there are annual franchise exhibition held in Sydney, Brisbane, Melbourne and Perth. At these you can meet and talk to franchise companies who are there promoting their franchise opportunity. This will give you an idea of the different types of franchises available. Please remember though that these franchise companies are there to sell and so will all tell you how great their franchise is.
The best way to approach exhibitions is to research franchising thoroughly before you attend so you know about franchising and are not overwhelmed or taken in by the franchises exhibiting. Before going you could arrange appointments to meet with any companies you are interested in. You can then go prepared with questions to ask. By being prepared you will take a lot from the experience of attending an exhibition.
This article will help you prepare "questions to ask the franchisor"
Educational seminars are usually also held in the exhibition hall, this is usually free advice so make sure you plan before go which ones you want to attend. Visiting the Franchise Council of Australia website should provide you with further information on forthcoming events.
Read more on "attending a franchise exhibition"
Assess personal suitability and preferences for franchise type
Finding the right franchise for you is about matching the skills and experience needed to run a franchise business with what you like doing and what you are good at.
In most cases you are able to work in a franchise industry where you have little or no previous experience as thorough training, initially and ongoing, would be provided to allow you to work in all areas of the business competently. Being able to start a new career with no experience is one of the great benefits of franchising.
Rather than finding the industry you want to work in, it is more important that you identify the type of work that suits you e.g. office work, retail, management, working by yourself, hands-on, professional. Doing this will help you to select the franchise type.
Read more on “franchise types”
Points to consider when researching franchise types:
Answering the following questions will help you to build up a profile of what you like doing and the type of work you have experience in.
- What type of experience do you have? – You need to identify the skills you have utilised in your career to ensure that the franchise opportunity you choose fits in with the skills and experiences you have.
- Do you management skills? Have you managed staff? – there are many franchises available that require management skills. If you have experience and enjoy managing, then these could be for you.
- Have you got administration experience? - Many franchise systems involve extensive administration work therefore it would be beneficial to have some experience in this area when looking at certain franchises. Or is there someone who could help you with the administration side of the business e.g. your partner.
- What do you enjoy doing and what are your strengths?
- What type of working environment do you enjoy?
- Do you want to work in a shop?
- Do you want to work in an office?
- Do you want to work on your own?
- What do you enjoy the most?
- Talking on the phone
- Motivating and managing people
- Working with your hands
Our “what is the best franchise to buy” article highlights that it is not about looking for the best franchise in Australia but the right franchise for you. It explains further how to identify what you are good at and what you want to do, to help find the franchise type that is right for you.
Identify suitable franchises within the right type and finance
Once you have identified the franchise type that is right for you, retail, office, mobile, professional, you can then narrow down the list of franchise opportunities within this type by investment level. This list will highlight different industries for you to consider, with the next step being for you to select the industry you prefer to work in.
This process will enable you to arrive at a shortlist of franchise opportunities that you can start applying for.
Our “finding the right franchise for you” article will provide you with more questions to ask yourself.
Assess the franchise/s
Remember that when buying a franchise you are going to be working, selling and promoting the product or service over a long period of time. As you can’t alter or develop the product or service, you need to make sure that the franchise has longevity and there are no threats to the market.
The franchisor needs to demonstrate a concise understanding of the future market and you both clearly need to understand the following:
- Is the market expanding rapidly or growing slowly, or is it static or declining?
- Does the product / service have USPs which will help it to sell? Does it merit a premium price?
- Who are the competition and how competitive would the product or service be in comparison to them?
- You have looked at the Australian market for your product, but what do you know of the local market in which you will be running your franchise?
Below are some questions to ask franchisors:
- Has the franchisor got a good financially track record? i.e. has not been made bankrupt ; has a good credit rating.
- What are the directors’ backgrounds?
- What were they doing before getting into franchising? And why did they decide to franchise?
- Has the franchisor got any franchises that are in a similar demographic area to yours?
- How successful is the franchisor and existing franchisees in Australia?
- Does the franchisor offer a comprehensive operations manual to support the training?
- How thorough is the training at the launch period and also continuously throughout the lifecycle of the franchise?
- How many franchises have they opened in the last 12 months in Australia? How many applicants do they reject?
- How many franchises have failed in the past couple of years and why?
Our “franchise questions” article includes more questions to ask a franchisor.
Confirm and arrange franchise funding
It is a massive step from first deciding to go down the franchise route to actually opening your doors for business. For many prospective franchisees, one of the biggest challenges is approaching a bank for finance.
Banks have learned over the years that, in most cases, it is safer to lend to those looking to buy into a well-structured, ethical franchise system than those looking to start-up their own business from scratch.
All of the major banks and other major franchise finance lenders have an accreditation system for franchises. The track record of the franchisor is therefore an important factor when deciding on how much money to lend.
You need to know your own borrowing capacity and so it is vital that you ask yourself the following questions:
- How much can I borrow? Prepare a full list of your personal expenditure such as mortgage, hire purchase, household bills, etc. This will show how much money you will need to take out of the business in order to live.
- What security can you give to back up your loan? You might have a life policy with some value, or have equity in your home.
- Start preparing your business plan - this is a vital document to obtain finance from the bank. Your chosen franchisor will often help you with this.
This “financial hints” article will give you further information on knowing your borrowing capacity
As part of your franchise business plan, you will need to prepare cash flow forecasts for the first couple of years of the business. Your franchisor will help, but you need to be sure that you understand the figures, what they are based on, how much you need to turnover in order to break even etc. This is your business plan so you know what it entails.
Your franchisor will usually help with detailing the start-up costs required and the preparation of the cash flow forecasts.
Read our “financial planning” article.
Check the legal agreements
Franchising in Australia is regulated. In many people’s opinion Australia has one of the strongest regulatory regimes in the world. Franchising regulation in Australia is done on a national basis, although some states have considered introducing their own franchising legislation (just as in the United States).
Read more on “legal advice” in Australia
The Australian franchise sector has been regulated by the Australian Competition and Consumer Commission (ACCC) since 1998. The code aims to regulate the conduct of participants in franchising towards each other and to ensure that they are sufficiently informed about a franchise before entering into it. The code also provides a cost-effective dispute resolution scheme for franchisees and franchisors.
The Franchising Code of Conduct has 3 key areas:
Disclosure of the pertinent information regarding the Franchisor
Conditions contained within the Franchise Agreement
Complaint handling and dispute resolution procedures
Read more about the "Franchising Code
Any franchisor wishing to enter into a contractual agreement with a franchisee must provide the franchisee with a document in four sections which include:
- Disclosure Document in the format required by the Franchising Code of Australia
- Copy of the Franchising Code
- Receipt document to be signed by the applicant franchisee
- Franchise Agreement
There are many business deals which require a set of contract terms but do not need the parties to sign a Franchise Agreement. However, once the business deal fits within the definition of a franchise set out in the Franchise Code each of the four documents must be prepared.
Read more on “the franchise agreement”
Visit franchisees to confirm your choice
Your best source of information for a particular franchise is those who have done it, the franchisees. Who else is more equipped to tell you all about the franchise?
Ethical franchisors will give you free access to any franchisee in their network and, in most cases, existing franchisees will be happy to talk things over with you. By visiting existing franchisees you can hear of their experiences and ask them questions about the franchisor and the franchise.
Be very wary of any franchisor who only gives you one or two names as there will usually be a reason for this. You will also find that the names they give you are the most successful franchisees in their network, or those with a greater financial interest in the franchise, and so will not be a fair representation of the whole network.
Some of the questions you could ask are:
- Is your franchise profitable now?
- Is the franchisor aware of changes in the Australian market and quick to adapt to them?
- If there is an illness, does the franchisor offer to help?
- What kind of on-going support do you get from the franchisor?
- How do you rate the training, systems and manuals you receive?
- Is the franchisor meeting all your expectations as well as those outlined in the agreement?
- How long did it take to recoup your investment?
- Does the franchisor welcome suggestions and feedback from franchisees?
Finalise the legal agreement
The franchise agreement reflects the complexity of the franchise transaction. To the franchisee, the franchise contract represents their investment. Your business depends upon it to the extent that the business may disappear should it terminate.
It is important that you seek legal advice from a lawyer that specialises in franchising as they will have looked at hundreds of franchise agreements and so know what to look out for. There is no point asking the lawyer you used to buy your house or finalise your divorce to look at as they won’t know what to look out for!
Once you and your lawyer are comfortable with what is in the franchise agreement, you will arrange to sign it and make payment as outlined in the agreement.
The process is therefore:
- Both parties sign the franchise agreement and are bound by it
- Obtain training schedule as relevant
- Introduced to the key people involved within the franchise
- Arrange date for launch of your franchise
If you have a legal question, why not put it to our "franchise legal experts"