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Want to start a business, but not quite from the beginning? Tim McIntyre gives you the low-down on the franchise business model

 

The Franchise Council of Australia provides free information for potential franchisees, as well as a copy of the Franchise Code of Conduct, at www.franchise.org.au.

A great business idea can be hard to come up with. It takes the ability to recognise a gap in a particular market, produce something that consumers want and will keep wanting, and a willingness to adapt as competition changes and the market place evolves. Franchises occur when a business idea is so successful that there is room for it to expand into new markets. Look at the Oporto chicken burger chain. Started in 1986 by one man in Bondi, Oporto soon developed a reputation for serving great food. The burger market was highly competitive, but no one was doing Portuguese style chicken burgers. Oporto first franchised in 1995, was named Australia’s fastest growing in 2005 and has now expanded into the UK, USA and New Zealand.

Franchises bring opportunity to people who want the chance to take control of a successful operation like Oporto, with a proven business model, but don’t quite have the risk appetite of a bottom-up entrepreneur. The brand is successful, so why not tap into those margins? Australia has one of the world’s highest franchise rates, covering sectors such as food, retail, auto servicing and even fitness. More than 1,000 franchising systems are currently operating around the country and they employ around 65 per cent of all casual employees. In fact, it is hard to imagine a type of food that hasn’t been touched by franchising. Try picturing a shopping mall with no franchise stores. Impossible.

There is money to be made in franchising, with proper preparation, extensive homework, a dedicated work ethic and a willingness to follow guidelines. Most franchise companies also offer ongoing support and training. However, success is not guaranteed. Like any business, franchisees can only get out what they put in. It may have seemed like a great idea to take on a Taco Bell outlet when the brand entered the Australian market in the late nineties on the back of hype from the US and a shortage of Mexican fast food. The venture failed however and was pulled out of Australia in 2005 after just seven years.

Before taking the plunge, potential franchisees should consider their options carefully. Typically, companies will charge between $50,000 and $1 million to even get off the ground. It may take a number of years to make profits. Taking out a Domino’s Pizza franchise, for example, requires a $60,000 franchise fee, a total capital investment of $300,000 to $500,000, a royalty or ongoing franchise fee of 7 per cent and a marketing fee of 6 per cent. This outlay covers a 10-year term of agreement, with an option to extend by a further 10 years at the cost of $6,000 per year. Such an investment is not one to be entered into lightly.

The Australian Competition and Consumer Commission says it is extremely important to undertake due diligence if considering operating a franchise business. A simple Google search can reveal any court cases or complaints involving the company, but it is also important to go out and do some extra legwork.

First, the information provided by the franchise company should be analysed closely. Franchisors are legally bound to provide every detail involved in running their business.

Second, advice should be sought from an accountant or other independent third party advisor. They can provide an honest, objective opinion and feedback on risks and other concerns.

Finally, existing or former franchisees are a good source of inside knowledge. Contacting one can help prepare for what to expect, potential problems and a greater insight into the costs involved with taking on the business.

The Franchise Council of Australia provides free information for potential franchisees, as well as a copy of the Franchise Code of Conduct, at www.franchise.org.au.

If the business fails for whatever reason, the consequences rest squarely on the shoulders of the franchisee. The head office will assist to an extent – they don’t want the brand name tarnished – but they won’t bail a business out like a European bank. They can simply close the area, lose their royalties and reopen somewhere else when another franchisee signs a contract.

It should also be noted that the franchisee has little freedom to get creative within the business. When entering a franchise agreement, the franchisee signs a meticulous contract with the franchisor, which strictly outlines acceptable practices within the businesses. This is to ensure all branches of a company are consistent and follow exactly the business model that made the brand successful in the first place.

The best performing franchises deal in areas where demand is a constant. Food, petrol, coffee and hair dressing all involve goods and services that are used regularly by the entire population. The safest bet is to open a franchise in such an area. Niche ventures centred on fitness, gift ideas and fashion are able to achieve success also, but may struggle in tough economic times when people cut down on some of life’s non-essentials.

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Case Study
‘Your franchisor is your support beam’
Name: Manpreet Singh
Company: Rain and Horne real estate
Location: Werribee, Victoria
Initial outlay: $300,000
Annual turnover: $1,300,000
Minimum contract period: 10 years

The positive aspect to starting a franchise is the potential to gain a wealthy successful business and lifestyle

When choosing a franchise, Manpreet Singh was attracted to Rain and Horne for a multitude of reasons.

“Rain and Horne has a dynamic franchise network, which embraces a culture of professionalism and support,” Singh says. He was also attracted to the fact it was a family organisation, with 122 successful years in real estate.

“The famous yellow and charcoal colours are known nation-wide and the brand is marketed across a broad range of media, with millions invested in print, television, radio and outdoor advertising,” Singh says. “This is a real advantage to franchisees, as any property listed with Rain and Horne is going to be noticed. The brand is well respected and represents professional trust and integrity.”

Singh says the company has been supportive and understands the importance of a good work/life balance, which nicely complements a tested and well-developed system that saves franchisees time and money and allows for maximum profitability.

Singh credits hard work and months of diligent research as the key to his success in the franchising game.

“I already had years of knowledge in the [real estate] industry, but needed to find the right company that would provide me with support and staff training, and who had cutting edge technology over competitors,” he says. “They also had to stand out from the crowd and make a difference. [These traits] offer an advantage and reduce the risk factor of starting a franchise.”

Once satisfied with the company as a whole, Singh met with the CEO, put together a business plan and cash flow projection and submitted it to the head office. The entire process form the point of enquiry to ownership of the franchise took him just nine months.

“The positive aspect to starting a franchise is the potential to gain a wealthy successful business and lifestyle,” Singh says. “The negative side is when you don’t conduct your research thoroughly and invest time and money in a company that is not well established and does not give you the structure and support you need. Your franchisor is your support beam, the core of the company.”

Singh maintains that managing a franchise is not difficult, as long as the right choices are made from the beginning. “You should oversee your cash flow on a regular basis, employ a strong, trustworthy team, implement policy procedures and adhere to them in your everyday tasks,” he says.

Singh wisely chose an industry with constant, ongoing demand. Real estate will be an integral part of society for generations to come. He also opened a franchise in a growth area. Werribee is in Melbourne’s growing south-west, on the way to Geelong; Victoria’s second largest city. With careful planning and due diligence, he has made a successful go of franchising. He offers a final bit of advice for anyone considering becoming a franchisee.

“Speak to someone who is already in the industry, meet and compare with competitors in the field and do not over commit. Compare overheads and profitability to see if the venture is worthwhile.”