Chapter 7 What to do Before Becoming a Franchisee

Chapter 7

What to do Before Becoming a Franchisee

Dominique Lamb | CEO Nat ional Reta il Assoc iat ion

Abouth the author

Dominique Lamb is the CEO of the National Retail Association and has extensive experience providing industrial relations and employment law advice to a range of small, medium and large businesses across a range of industries. In 2011, she was awarded the Australian Institute of Management’s Young Gun of the Year Award, and in 2016 Dominique was a finalist in the Brisbane Women in Business Awards.

The National Retail Association

The National Retail Association (NRA) is Australia’s largest and most diverse industry association. As a not-for-profit organisation its members range from small, family-owned and operated businesses to leading national brands and span nearly every retail category including fashion, groceries, department stores, household goods, hardware, fast food, cafes and services. The NRA is the only retail industry association to deliver practical legal advice through its wholly owned and incorporated legal practice, NRA Legal. Its mission is to support, inform, protect and represent the interests of retailers and fast food businesses, providing advice on issues such as employment law, industrial relations, training information, workplace health and safety issues, event details, advocacy and policy updates, HR advice and migration and visa issues.

Deciding you want to enter the world of being your own boss while also trading under the name of an established brand is one thing, but picking the right franchise business is easier said than done.

Since big American chains such as McDonalds, KFC and Pizza Hut arrived on Australia’s shores in the 1970s, franchising has expanded to all parts of the retail sector. According to the Franchise Council of Australia, there are now almost 1,300 franchise business formats in Australia ranging from small to large multi-nationals.

At its inception in Australia, franchising mostly provided a means for foreign brands to extend into the Australian market. However, it has since been embraced by myriad local retailers, who have gone from being a successful small business to an established brand that covers numerous geographical locations.

But as with any investment, it’s crucial that you make sure you’re aware of the game you are getting into and carefully weigh up the pros and cons.

Don’t dive in headfirst, do your research

Before you do anything, you should conduct some thorough research of not only prospective franchises, but franchising in general. There’s a lot more to it than simply getting the keys to the store of a well-known retail brand and then watching the money roll in.

For each individual franchise, you consider, research their history and gain an understanding of how they have evolved as a business. Some basic information about a franchise can be easy to access, and you should look for the following:

Has the franchise steadily expanded over several decades or have they exploded overnight?

Has their number of individual stores been higher at a previous point in time?

Are they located across the country, or are they concentrated in specific areas?

Do they cater to a broad consumer base, or are they tailored to a niche market?

There isn’t necessarily a right or wrong answer to some of the above questions. But it’s essential to have a firm grasp of the business beyond simply having been a casual customer in the past. Informing yourself also enables you to conduct a rigorous enquiry with the business in question, which will help you decide on whether their brand is the one for you. For instance, if the franchise has had scaled back its operations, it’s a good idea to learn why.

It’s also highly recommended that you reach out to some existing franchisees. Personally contact between three to five owners from the franchise in question and take the time to pick their brain on their experience. By talking to a reasonable sample size, you’ll be able to identify any consistent themes (positive or negative), and it will provide you with a gauge on what sort of relationship you can expect with the franchisor.

Do the sums

Buying into a business is possibly the biggest investment you will ever make. Hence, getting the right price is hardly a trivial matter. Take careful stock of your financial position and tally up the value of your existing assets and liabilities. Consult with a bookkeeper or accountant to ensure you have the full picture of your financial situation.

It’s important to note that the major expenses do not end with the upfront fee. There’s also the initial costs associated with obtaining a lease, staff recruitment and training, fit-out expenses and other startup costs. As a guide, the Franchise Council of Australia cites the average upfront fee for a retail franchise sits at $31,500.

If the numbers don’t stack up, don’t turn a blind eye. Either look to invest in an alternative franchise that is within your price range or reconsider your intentions altogether.

Don’t listen to anecdotal stories

It’s important to note that ‘research’ does not refer simply to a basic google search or relying solely on a few anecdotes you’ve heard. The internet is flooded with plenty of cases where things have not gone swimmingly between a franchisor and a franchisee/s.

While there have no doubt been instances within the sector where things have gone wrong, be mindful that media is seldom going to report all the franchising success stories. A story where a franchisee has reportedly been dudded by a franchisor is going to generate more interesting headlines, than a case where a franchisee has built a successful business off the back of a productive relationship with the franchisor.

Understand what assistance the franchisor provides

By its very nature, any relationship with a franchisor sees them provide certain services and resources that you otherwise wouldn’t get by starting your own business from scratch. In the first instance, they will obviously be granting you the ability to operate under their brand name, but that should just be the tip of the iceberg when it comes to what a franchisor should provide a franchisee.

Services that a supportive franchisor should offer you include things such as:

A brand with a high degree of name recognition, at least amongst its target market; A track record of sustained success over an extended period of time; Highly effective operational processes; Strong provision of training services; Clear guidelines on how the relationship is to function; and A proven ability to adapt their services and products to changes in consumer demand.

Understand your own strengths & weaknesses

Are you looking to invest in a food or drink franchise without having ever worked in hospitality? Or are you a qualified chef who has never run your own business? Or are you looking to open a franchise under a brand name that you’ve never once shopped at?

We could go on, but the above hypotheticals all go to the same central point – be conscious of knowing what you don’t know. No one who opens a franchise is a master of every single facet to running the business. Indeed, if you’ve opted for a franchise model, it would, at least in part, be because you like the security of not being completely ‘on your own’.

However, having a firm understanding of your gaps is the first step towards bringing yourself up to pace with the things you don’t have experience in. Running a business is more than simply putting in long hours on the shop floor, it also involves tasks such as rostering, managing staff, ensuring full compliance with legal obligations, and having a sufficient level of financial literacy.

The first step to bringing yourself up to speed with anything in life is being able to identify what that blind spot is, so ensure that you’re conscious of the skills you need to master to run the business well.

Leasing arrangements

Your lease is arguably your most valuable asset, or your largest liability depending on factors such as location and the terms and conditions. The lease can be held under either the franchisee’s name or that of the franchisor. In any event, it is critically important that you carefully interrogate the Lease Agreement and Lessor Disclosure Statement to acquire a full and accurate understanding of your obligations.

If you negotiate your own lease, the franchisor can still assist in negotiating with the lessor regarding aspects like rent or control of the site location. Under this arrangement, the franchisor does bare some risk that the franchisee – having established the business and built a loyal clientele – exits the franchise business and rebrands under another banner. It’s for this reason that many franchisors insert a clause in the contract that the lease ends upon the termination of a franchising agreement.

The rental payments contained under the lease should be closely linked with the location. If you end up in a spot that won’t see a large degree of foot traffic, you need to make sure what you’re being charged for rent is reflected by that. If you’re paying too much in rent, you’re in trouble from the very onset.

A poorly-negotiated lease can have a detrimental effect on any business. The importance of getting independent, specialist advice cannot be overstated. This relatively small expense will pay for itself if it’s the difference in obtaining affordable rent.

Engage an expert before you sign anything

Even if you’re satisfied that you have enough money in the bank and that your due diligence has led you to conclude that a certain brand is for you, it still pays to engage an expert before you put pen to paper. A bookkeeper is great at telling you the financial situation but, with all due respect to bookkeepers, they’re not in a position to provide expert advice on legal matters.

A legal professional who specialises in Industrial Relations Law will safeguard you from signing on the dotted line without an accurate and thorough understanding of your obligations. Indeed, many of the cases where a significant dispute has arisen between a franchisee and franchisor has occurred when a contract has been signed without a full understanding of the terms of the agreement.

If you’re purchasing an existing franchise business, you, in particular, need to be aware of the transfer of business obligations imposed under the Fair Work Act 2009 (Cth). Failure to get this component of the contract right can result in severe consequences. A transfer of business can impact you in the following regard:

If existing employees are deemed to be ‘transferring employees’ once you take the keys to the business;

If the length of service already performed by transferring employees under the previous employer needs to be accounted for; and

Are you liable for entitlements accrued by transferring employees such as annual leave, personal leave, long service leave, and redundancy pay?

What research a franchisor should do on you?

Proper due diligence should not be confined to you as a prospective franchisee. The franchisor should have a stringent and rigorous vetting process in place to ensure you tick all the necessary boxes. Although this may seem burdensome, any franchise worth its salt should be ensuring that all store owners operating under their model meets the highest possible standards.

There’s the obvious need to manage financial risk by not awarding a contract to a franchisee who doesn’t have the necessary financial clout. But it’s also imperative that store owners fit the culture of the business and won’t drag the brand name down by being a poor owner. Some franchisees try to take some license with the business, falsely thinking they have carte blanch to run it how they see fit. Every successful franchise provides uniformity of standards across the chain. The ingredients for menu items at a fast food chain doesn’t change from store to store, nor do the services offered by accessory franchises.

A franchisor, therefore, should be paying close attention to whether you meet their standards. Rather than taking it personally, you should be reassured by this as you can be guaranteed that the same vetting occurs for other franchisees. And this dedication to

highly reputable franchisees means that your business is unlikely to suffer due to a drop in reputation for the brand from other poorly run stores.

Roll up the sleeves & get ready for hard work

Like any business, running a franchise is no walk in the park. Long hours, significant responsibilities, navigating the ups and downs of the market, and the day-to-day challenges of running a small business are all there, however, if you do your homework and make the right investment it can be incredibly rewarding – both financially and emotionally.

Don’t be reluctant about engaging experts to help ascertain your financial position and to obtain the most appropriate lease possible. As the old saying goes ‘it pays to get things right the first time’, and that adage could not apply more aptly than to becoming a franchisee.

Dominique Lam b | CEO National Retail Association

1800 738 245