Size of the Franchise Industry

One of the ‘most franchised’ countries in the world.

Around 1,180 franchise systems in 2012.

Estimated 73,000 outlets.

Generates $131 billion in revenue (6% of economy) – about half of this is car sales and fuel retailing.

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Franchising Trends

Massive growth in the number of franchise systems in past 10 years (from 700 in 2002 to 1,180 in 2012).

Strong growth in ‘buying a job’, ‘mobile’ and ‘at home’ franchises.

Full employment in Australia – difficult to find suitable franchise candidates.

Difficult to find suitable sites at economic rates.

Franchising Trends - cont

Where are the franchise opportunities; 43% in retail (17% food and 26% non-food). 15% in domestic, administration and support services. 11% in ‘other services’ (eg personal services, pet care, auto

repair and IT services) 7% in rental, hire and real estate services. 6% in education and training.

See the Franchise Council of Australia’s franchise business directory at: www.franchisebusiness.com.au

Franchising Trends - cont

Strong growth in ‘outsourcing’ household activities Meals (food retailing) Cleaning Gardening Home maintenance Car maintenance Child minding Pet care

Franchising Trends - cont

Strong growth in ‘outsourcing’ non-core business activities; Building / cleaning maintenance Financial services Accounting / administration Computing / IT HR / Recruitment Property services (leasing / rental)

Purpose of the Workshop

Help you make a more informed decision on whether to buy a franchise.

Help you to determine the right type of franchise for you .

The Business Format Franchise

A Franchise has the following key elements;

An agreement.

The right to use a brand / trademark.

access to a business system and / or marketing system.

Initial and /or ongoing fees payable.

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What are the Advantages?

Access to an entire ‘proven’ business concept.

Franchisor’s knowledge and experience.

Access to a known brand.

Exclusive access to product / territory.

Initial and ongoing training / support.

Bulk purchasing power.

Product / service development.

Group marketing activities.

Part of a group – share knowledge and experience.

Reduced risk of proven model.

Easier to access finance (in some cases).

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What are the Challenges?

The control of the franchisor.

Having to abide by the Operations Manual / Systems.

Frustrations of being part of a group.

Different personalities may affect your business.

Restrictions on selling the franchise.

Up-front and ongoing fees.

Step 1: Evaluating Yourself

What is your Motivation?

Job satisfaction.

Independence.

To make money.

Improve Lifestyle.

To provide jobs for the family.

Career security

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Franchising might not be right for you if you . . .

1. think franchising is the same as running your own business.

2. are not willing to follow systems.

3. have unreasonable expectations (on the franchisor).

4. don’t have the support of your partner / family.

5. lack of business confidence.

6. are complacent and have the wrong aptitude.

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Have you also considered . . .

Affect on lifestyle / hours of work.

Financial risks – there are no guarantees of success!

Discipline and temperament to follow a system

Partner’s input into decision

Willingness to move family for the right opportunity

Growth / exit plans

Franchise ownership vs Independent business ownership

4 Questions to ask yourself:

Can you operate in the industry successfully without being part of a franchise group?

What are the benefits of joining the franchise group?

Am I too ‘entrepreneurial’ to be a franchisee?

Am I prepared to follow the systems of the franchisor?

What industry do you want to be in?

More than 40% of opportunities are in the Retail Sector? Is retailing for you?

Do you like dealing with customers?

Do you like managing staff?

Do you want to leverage off your own skills / industry expertise (or are you open-minded on opportunities)?

Are you buying ‘yourself a job’ or a ‘business’?

What funds do you have available to invest?

Set a budget and stick to it.

Are you willing to put the ‘house on the line’ (if needed)?

Have funds available to cover working capital, prepayments and security deposits.

Some larger franchise systems have preferred financing arrangements and internal recruitment programs.

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How much do you need to invest?

Anywhere from $20,000 - $500,000 +. 65% of franchise opportunities are under

$100,000.

20% are $100,000 - $250,000.

15% are $250,000 +.

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How much do you need to invest? (cont)

Investment Required Type of franchise

Up to $20,000 * Supplementary Income Businesses

  * At Home Businesses

$20,000 - $50,000 * Supplementary Income Businesses

  * At Home Businesses

  * Mobile Businesses

  * Service-based Businesses

$50,000 - $100,000 * Mobile Businesses

  * Service-based Businesses

$100,000 - $250,000 * High-end Mobile Businesses

  * Low-medium Shop Front / Retailing Businesses

$250,000 - $500,000 * Shop Front / Retailing Businesses

  * Premium Retailing Businesses

$500,000+ * Premium Retailing Businesses

  * Established Premium Retailing Businesses (with goodwill)Page 10

How much do you need (or expect) to earn from the franchise?

Everyone will be different.

How much are you earning now?

Can you afford a lower income as the business builds up?

Seek a minimum 25% + return on investment (plus salary / drawings for investments of $200,000 +).

Return on investment for lower investments (i.e. less than $100,000) may need to be higher.

Do the sums!

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Step 2: Evaluating a Franchise Proposal

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Typical Fee Structures in Franchise Systems

The initial investment in a franchise will generally include a one-off ‘Franchise Fee’ which may range from $30,000 to $70,000.

In most franchise systems Franchisees are charged ‘royalty fees’ and ‘marketing fees’ on an ongoing basis.

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Typical Fee Structures in Franchise Systems - cont

Royalty fees in retail businesses generally vary between 5%-8% of weekly sales (for serviced-based, mobile or at-home businesses it is generally 8%-15%).

Marketing fees generally vary between 2-5% of weekly sales.Note: these fee structures are indicative only. The way in which fees are charged will depend on the franchise model and will vary from franchise to franchise.

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Key Elements of Successful Franchise Systems

Saleable and attractive franchise package. Well presented

Well developed marketing / BD strategies

Thorough training package

Product / service with genuine appeal

Strong advocacy from franchisees

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Key Elements of Successful Franchise Systems - cont

Strong / successful management team.

Proven track record in the business.

Concept can be easily replicated – ie adequate sites and territories available.

Profitable and happy existing franchisees.

Exclusive products, equipment, knowledge.

Successful marketing strategies.

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Key Elements of Successful Franchise Systems - cont

Well developed manuals and systems.

Adequate resources dedicated to training and supporting franchisees.

Well established criteria for site selection and territories.

Rigid franchise selection process.

The concept is not a fad!

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Other Considerations in Evaluating a Franchise System

Speak to franchisees.

Visit sites – see how it works.

Spend time in the business.

Clearly understand what training and support the franchisor will provide.

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Other Considerations in Evaluating a Franchise System

Try to be objective, not emotional.

Research, Research, Research (websites, local market, competitors).

Always ask yourself:

“Can I do this successfully myself without being part of a franchise group?”

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Step 3: Seeking Professional Advice

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It is essential …

Preferably from people experienced in franchising

That you seek professional advice from suitably qualified legal and financial practitioners before proceeding with any form of business agreement

Important Documentation

Franchising Code of Conduct

Disclosure Document

Franchise Agreement

Key People

Solicitor

ACCC

Industry Associations

Existing Franchisees

Financial Institution

Accountant / Franchise Advisor

Franchising Code of Conduct

Introduced in 1998 to regulate the franchise sector.

Administered by the ACCC.

Know your rights.

Mandatory disclosure of information.

Read and understand the Code.

Code revised in 2010 with increased disclosure requirements for franchisors.

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Disclosure Document

Must be given to a prospective franchisee. It provides; Franchisor details. Franchisee details. Policies, terms and conditions. Trademark, patent, design or copyright details. Site Selection / Territory details. Financial information – investment required /

earnings information.

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Franchise Agreement

Initial services. Continuing services. Trade names, trade

marks and copyright. Territorial rights. Period of the

agreement.

Initial and continuing obligations.

Operational controls. Sale of business. Asset protection. Dispute mediation. Termination.

Must be given to a prospective franchisee. It provides;

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The Franchise Recruitment Process

The recruitment process is governed by the Franchising Code of Conduct.

A Disclosure Document must be issued at least 14 days prior to entering into an agreement.

Ensure you seek independent professional advice on the disclosure document and franchise agreement.

The Franchise Recruitment Process - cont

Carefully consider;

How professional is the franchisor? (eg franchise kits, website, interview process).

How rigid is their franchise recruitment process? Have they done their due diligence on you? Are they desperate?

The Franchise Recruitment Process - cont

Just because you have the money doesn’t mean you have the right.

Speak to Franchisees!!

The franchise recruitment process generally takes around 6 weeks at a minimum (then a suitable site may have to be found).

Retail Leasing

The Retail Leases Action 2003 is the major governing legislation for retail leasing in Victoria.

Landlords must provide tenants a ‘disclosure statement’ and a proposed lease agreement at least 7 days prior to a lease is signed.

A disclosure statement details aspects of the lease such as rent, ongoings and other obligations.

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Retail Leasing - cont

The lease may be held by the franchisor or the franchisee.

Generally, the franchisor will have discretion in the franchise agreement as to whether they hold the lease.

Franchisees should obtain advice from a solicitor prior to entering into a lease / sub-lease of a premises.

Before signing a lease consider the following:

The term of the lease and options to renew

Rent and the basis of rental reviews

Outgoings or shared operating expenses

Obligations to repair/maintenance

The disclosure statement

Permitted use

Assignment of the lease

Taking the Next Step . . .

Complete the;

Evaluation Checklist

Personal Action Plan

Buying a Franchise Flow Chart

Prepare a Business Plan (covering a marketing plan, operational plan, workforce plan and financial management plan)

For Business Planning guidance refer to Small Business Victoria’s ‘Business Planning Basics’ Seminar

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Don’t forget …

Don’t forget to fill out the evaluation sheet at the front of the book!

See the Participant Workbook for self-evaluation, personal action plan, buying a franchise flow chart

Small Business Mentoring Service

Business mentors help you to identify a clear direction for you and your businessBusiness mentors can also advise you on how to:

conduct market researchwork out your breakeven pointprice and/or cost your products or servicesdevelop an effective marketing strategyuse other business management tools

To arrange a session with a business mentor go to:

www.sbms.org.au

Questions?

Thank you for attending

Check outbusiness.vic.gov.au/workshops

for more workshop information