What is a Franchise?
In a franchise, the owner of a business’ trademarks, styles, processes, products and systems (franchisor) sells the right to another entity to operate a business using those same products, or services (franchisee). In Australia, a franchise structure is one of the most recognisable business structures and is often used by business owners to assist in the expansion of their brand and business.
A franchise model can be rewarding for both the franchisor and franchisee as a properly established and operated franchise model will allow for a fair amount of control by the franchisor as well as education and support for the franchisee. If you want to start franchising your model, serious consideration needs to be given to the systems that are in place before you sell franchises to other business owners.
When consulted by a prospective franchisor as to how best franchise their business, I advise them to put themselves in the shoes of a franchisee who knows nothing about their business. The business owner needs to give serious consideration to the knowledge and ongoing support they will need to start and successfully operate a new business. By going through this process, you will readily identify all of the information your franchisee will need to start the business from scratch. Important considerations include (this list is not exhaustive):
- (a) Identifying the intellectual property of the business
- (b) How the shop and/or shopfront should be laid out
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(d) Business operations and documentation of processes and procedures
(e.g. the franchise manual) - (e) What agreements does the business have in place with its customers and/or clients?
- (f) Employment conditions, including awards
- (g) Advertising and marketing campaigns and division of costs between the franchisor and franchisee
- (h) Purchase of stock and inventory from preferred suppliers by the Franchisee
There are many other considerations that are specific to a particular type of
business intended for franchising, thus it is important to ensure that a business is set up correctly and all of the necessary checks and balances are in place before it is franchised.
Benefits Of Franchising Your Business
The relationship of franchisor and franchisee is a vital consideration that may be the difference between the success or failure of the franchise. The decision of who to bring into a franchise is like any other business decision; the right one can result in a long and fruitful relationship. However, choosing the wrong franchisee can result in disaster, as you will be stuck in a business relationship that will not work and can lead to the failure of the franchise.
From the Case Files
One such disastrous example is related to an owner of a franchise business that sells coffee and coffee-related products. This franchise company has in excess of 60 franchises around Australia and runs a very successful program to bring new franchisees into their business. However, the problem with their business model was that they accepted anyone who applied to be a franchisee of the business meaning they had no control over who came into the business and they had a lot of franchisees who simply were not up to the task. The franchise business had certain procedures in place that required the franchisee to work hard and in particular had a system to achieve a guaranteed goal of cups of coffee sales in any one day. However, as a result of their non-discreet nature of accepting franchisees, one in particular was just not the right fit which resulted in the franchisor unsuccessfully spending a lot of time, money and energy trying to improve the franchisee. This resulted in the franchisee suing the franchisor for alleging that they were not trained properly and both parties lost a lot of money in legal fees.
A more successful example of where a business owner was selective in who they accepted as a franchisee was a pizza restaurant business. The franchisor was a larger company that also owned the franchises of many other different brands in the food and beverage industry. They knew that they had to be very careful and conduct rigorous checks on each prospective franchisee to ensure that they had the requisite business knowledge, they were put through the appropriate level of training, and their financial position had to be sound. Only once a franchisee had passed the checks could become a franchisee of the business. The franchisor found that they rarely had any issues with the franchisees and, if they did, it was usually due to some other intervening cause.
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