ChaPter 2: essentiaL stePs to beCominG a FranChisee

ChaPter 2

essentiAL stePs to beCominG A FrAnCHisee

dominique Lamb | Ceo NATIONAL RETAIL ASSOCIATION

About 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 one of 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.

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 brand you are investing in and carefully weigh up the pros and cons.

research is fundamental

Before you do anything, you should conduct some thorough research of both prospective franchisors, 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 (noting the impact of the global pandemic has presented challenges for certain businesses)?

• 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 important 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 understand why. It’s also highly recommended that you reach out to some existing franchisees. Personally contact between 3-5 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,accountant or other qualified professional to ensure you fully understand

you financial situation and your capacity to start, and successfully run, a franchised business.

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 legal advice, negotiating a lease, staff recruitment and training, fit-out expenses and other startup costs..

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.

Anecdotes vs real research

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’s 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, administering payroll, managing the performance and conduct of 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.

negotiating a lease

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 – particularly, before you sign it! 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 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 an affordable rent.

engage an expert early

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, they’re not in a position to provide expert advice on legal matters. It’s

a little like hiring a plumber to work on your wiring issues! Each one has their own expertise, but should never take on a job the other should be doing. A legal professional who specializes in employment law will safeguard you from the compliance traps associated with employing staff. Time and again, franchisees do not approach an expert in employment law until the eleventh hour, or worse, until after the contract has been signed, despite having an insufficient understanding of their own affairs.

By that stage, it becomes more difficult to obtain complete and accurate advice on the terms of the agreement. There are complex components in these agreements and something that seems innocuous to your or your bookkeeper could, in fact, lead to serious financial and legal implications for you down the track.

For example, just one of the reasons buying a franchise business can be complex is because under the Fair Work Act 2009 (Cth), the sale of a business from one company to another in certain circumstances may constitute a ‘transfer of business’. When a transfer of business arises, the Fair Work Act 2009 (Cth) imposes a number of obligations on both the vendor and purchaser. Getting this part of your contract wrong (and this is just one component), can have dire consequences. Specifically, a transfer of business will have an impact on: · whether employees of the new employer are deemed to be “transferring employees”; · whether the length of service performed by transferring employees for the older employer must be recognised by the new employer; · whether the new employer inherits and becomes liable for the transferring employees’ annual leave, personal leave and long service leave accruals; · whether employees of the old employer are entitled to redundancy pay and notice in circumstances where they have not been offered ongoing employment with the new employer; · whether transferring employees are able to bring an unfair dismissal claim if they are terminated by the new employer; · what records the old employer must provide to and be requested by the new employer in relation to any transferring employees; and · what industrial instrument applies to transferring employees and new employees engaged by the new employer. Bypassing this step in order to save money is the ultimate false economy, as you will literally be risking your business, your home and your family’s financial future.

Franchisor due diligence on prospective franchisees

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 meet 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 lAmb | Ceo national retail Association

1800 738 245