Buying a franchise

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Franchising can give you a head start in running a small business. As a franchisee, you buy an interest in the franchisor’s business, paying for the right to run an operation with an established reputation and brand name.

 

• Franchise types
• Doing the numbers
• Getting support
• Pros and cons

The franchisor provides you with the business model and structure, a product or service to sell, and marketing and training support. In return, you pay upfront and ongoing fees for the right to conduct the business. The relationship is like a commercial marriage, strictly governed by a contract.

 

While a franchise gives you a head start, it doesn’t take all the hard work out of running a business.

 

Franchise types

Most franchises are business format franchises, in which the whole business concept is licensed, including the name, appearance and method of carrying on the business.
 

There are other forms of franchise, known as product and trade name franchises, where the franchisee is licensed to sell products manufactured by the franchisor, or the franchisee manufactures and distributes the franchisor's product.

 

Doing the numbers

If you’re thinking of buying a franchise, you’ll need to do the numbers and check whether you’d get a reasonable return on your investment and effort. Ask yourself if you could abide by the strict rules set down by the franchisor and meet the ongoing costs involved.
 

Make sure you get advice from a lawyer and an accountant. A franchise is a legal relationship as much as a commercial one, so you need to be satisfied with the conditions before you commit yourself.

 

Getting support

The franchise industry is well governed. The Franchising Code of Conduct is a mandatory code applied to franchise business arrangements. The Australian Competition and Consumer Commission (ACCC) enforce the code, which sets out obligations of franchisors and also provides a mediation procedure for disputes.

 

Under the Franchising Code, when you enter a franchise agreement you'll receive a disclosure document, which should list details of the franchise network, prepayment and establishment costs, other financial details and the names of other franchisees.

 

Pros and Cons

Pros	Cons
Startup cost. You may need less capital to buy a franchise than to buy another existing business.	Startup cost. It may cost more to buy a franchise than set up a business from scratch. The up-front franchise fee may be large, and you have to pay ongoing royalties.
Lower chance of failure. Franchises have a better record of survival than other small business start-ups.	Restrictions on sale. The franchise contract may restrict the sale of the business (having to sell the franchisor), making it harder to recoup your investment.
A network. Franchising offers some independence in running your business with the benefits of working within a bigger commercial network, like advice and help with business challenges.	Dependence on others. The franchisor may make bad business decisions that will affect your business. If the franchisor’s business fails, then your business may also fail. If other franchisees perform poorly, that can damage your business.
Proven formula. The franchisee has a proven formula, established product or service, brand recognition and reputation, reducing risk of failure.	Lack of independence. The franchisor's policies may affect your profitability. You may have to buy from a particular supplier at inflated prices or rent a shop in an expensive location.
Support. You'll receive support from the franchisor, often including site selection, shop fit-out, and a business plan. Ongoing support, including training and marketing should also be provided.	Loss of control. The franchisor usually controls many of the details of the business, from sales targets to supplier agreements and the way the business is run.
Financial help. The franchisor may give you financial assistance, and financiers may be more willing to lend to you if you're operating under an established name.	Risk of going under. If your business goes under, so might you. Many people risk their homes and a lot of money to own a business and that may be lost if the franchise business doesn't work.

 

Where to find out more

• ACCC Franchisee Manual
• ACCC Franchisee Start-up Checklist
• ACCC Franchising Code of Conduct
• Commonwealth government guide
• Franchising Council of Australia
• Office of the Mediation Adviser

 

Tools and templates

• Buying a franchise checklist

 
 

• Important information 
  As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. All products mentioned on this web page are issued by the Commonwealth Bank of Australia; view our Financial Services Guide (PDF 59kb).