Get into Business - Franchises

Whether you are an experienced or inexperienced business owner, our ‘get into business’ series will provide you with a useful guide to understanding the main issues prospective business owners are faced with. The three-part series will feature the key options of buying a franchise business, purchasing an existing business, or building your very own business from the ground up. This edition will focus on buying franchises, which are a good option particularly for anyone that has not previously owned a business.

You open the paper, only to read more about companies laying off staff, rising unemployment, and businesses that are failing left, right and centre. While you realise that the media has been reporting economic disasters with over-enthusiasm lately, you still can’t help but wonder if your job is next. Your future is in your boss’ hands and you are tired of it. You have always wanted to go out on your own, wanted to be the one who calls all the shots and wanted to be your own boss.

With unemployment numbers continuing to rise, there is will be no shortage of perfectly experienced people hunting for work. During the process of finding another job, going out on your own may be the last thing on your mind during a period of economic downturn but believe it or not, now could just be one of the best times to crank up the entrepreneurial spirit and take the steps to owning your own business.

Without the security of solid employment, there has been a surge of interest in franchises as people are considering buying a business as the next step in career options. Franchising in Australia is a business sector that has achieved phenomenal growth, becoming a highly significant and dynamic business activity in the economy. In fact, never before in our country’s history has there been such interest in buying franchises.

Surveys conducted by the Franchise Council of Australia (FCA) indicated that the growth rate of franchise systems from 2006 to 2008 was 14.6 per cent, with an estimated 1100 in operation. The surveys also found that a total of 28 franchised organisations appeared in the 2008 BRW’s List of Top 500 Private Companies in Australia.

According to IBIS World, the franchising sector in Australia achieved revenues of over $150 billion during the 2008 financial year, and managed a six per cent growth against a GDP rate of 3.5 per cent. The top 20 growing franchises had revenues of just under $1 billion with an average growth rate of 66 per cent.

Evidence even suggests that franchises appear on track to do well despite a slowing economy. FCA executive director Steve Wright told the Sun Herald that in the 1992 recession, franchising performed well and he expected it to do well again now.

“The number one franchise buying and selling website franchisebusiness.com.au, has reported increases in site traffic and advertising by site members in the early stages of 2009,” said Steve. “Most importantly, (they) do relatively well in a downturn.”

“Statistics for failure in the franchise industry in Australia are quite low,” Steve said. “Five years after buying a franchise, more than 90 per cent of franchisees are still in business. Compared to the figures for small business, franchises are still an extremely good bet.”

Hallmark Business Sales principal Harvey Weyman-Jones explained the advantages of buying a franchise during the current economic conditions.  

“This is probably the best time and best value to buy a business than what we have seen over the last 40 to 60 years,” said Harvey.

“Prices have come down a bit than from what they were two years ago ... so they are buying something that was a bit cheaper than it was two years ago, in whole price terms, but it is actually costing them less money to borrow to buy it. So, they are actually very good value,” he explained.

“If the business is sustainable and continues to trade profitably through these slower times, and comes out the other end as a successful business, then after a few years the buyer will say ‘that was the best thing that ever happened to me’.”

There are many reasons why a franchise makes sense, particularly for business people looking to get into owning a business for the first time. While the temptation of becoming your own boss will stand out to the entrepreneurially inclined, there are many other advantages that come with owning your own business.

Harvey explained the main advantage of owning a business was a sense of security.

“Business owners are the last to get fired and are not subject to anybody else making the decision for them to lose their job,” he said. “In other words, they are masters of their own destiny.”

“You are also buying yourself an asset that you can sell at some stage in the future, hopefully for a larger amount of money than what you paid for it,” he added.

Owning a franchise system can offer further advantages to being your own boss, with instant access to proven brand recognition, an established distribution model, wide networks, all the training you need, as well as a big hand with marketing.

“Franchises can be very good business, whereby they are a shoulder to lean on for the inexperienced business owner. There is someone to lean on to talk them through the problems which they may have had, which is part of paying the franchise fee,” said Harvey.

“You are also paying for a well known brand, as opposed to starting up a business with a brand name where nobody knows you,” he said.

Buying a franchise also allows the franchisee to buy support, systems and procedures that have proven to work and come with collective resources such as administrative head offices, call centres and warehouses.

Harvey explained that for the more inexperienced buyer, franchises were good because there was less risk involved.

“We tend to value franchises at a higher multiple of earning than your ordinary individual business,” said Harvey.

“For example, your Subway restaurant compared to your ordinary sandwich shop. Each one earns the same amount of money but the Subway restaurant would be worth more because of the perceived lower risk.” 

However, buying a franchise can also present some limitations. According to the Retail Marketing Survival Guide, the fact that there is a strict Franchising Code of Conduct to be adhered to is one of the restrictions.

Franchises can also be quite rigid because there are things that need to be done a certain way. Most promotional initiatives must pass the franchisor’s approval, which does not always suit everyone.

“Alternatively, if something goes wrong with the franchise name, that has nothing to do with you, it could end up affecting you and that is a negative,” said Harvey.

While the franchise industry has an impressive success rate, it is worth remembering that there is no business venture that comes without risk. The best advice to get started out in franchising would be to do your research so that you are well prepared. Harvey suggested speaking to a professional, whether it was a lawyer, accountant, business advisor or business broker.

Organisations such as the FCA and the Australian Competition and Consumer Commission also provide extensive information about the franchise industry, franchising codes of conduct, advantages and disadvantages, obligations, checklists, questions and much more.

The necessary information you will need to get you started is available from:

The Franchise Council of Australia: www.fca.gov.au
The Australian Competition and Consumer Commission: www.accc.gov.au

This Articles Comments

SM - Buderim commented on 06-Jul-2009 03:27 PM

This was helpful

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