Franchising - a popular option for small business
FOR many Australians the idea of running their own business is very appealing, and buying into a franchise is one option that can be a lot easier than starting a business from scratch. However there are no guarantees of success and there lots of pitfalls to avoid.
Australia is often described as one of the most franchised nations in the world. There are literally hundreds of franchises to choose from - including service-based businesses like mortgage broking or real estate through to international operations selling hamburgers.
In many cases you don't need prior industry experience to buy into a franchise but it could certainly help in terms of knowing what you're getting into. Two things you definitely will need are adequate upfront capital and a clear understanding about how much hard work it can take to build a successful business - even when you have the benefit of a well-known brand behind you.
The broad choice of franchise options available means there is an equally wide range of set-up costs involved. You could get away with buying a franchise for just a few thousand dollars, or you could be looking at closer to a million dollars with the likes of, say, McDonald's.
In addition to the initial outlay of purchasing a franchise, the 'franchisee' (that's the person buying into the business) can expect to pay ongoing fees or royalties to the 'franchisor' (the parent company). You'll also be expected to meet other costs stipulated by the franchisor - and these can range from contributions to marketing funds, mandatory purchases of staff uniforms and other supplies, and even buying into specific accounting and software systems.
All this cash outflow can pay off. Franchises generally have a higher rate of success than independent small businesses. And in many cases banks are more willing to lend to franchisees looking for start-up capital than solo entrepreneurs backing an idea of their own.
That said, success as a franchisee is not guaranteed. You need to be prepared to invest plenty of time and energy building your business, and the Australian Competition and Consumer Commission (ACCC) warns that any outfit claiming you can make a lot money with little effort in franchising is probably a shyster and should be avoided.
The close relationship shared between franchisors and franchisees is not to be underestimated, and it is essential to do plenty of research on any franchise system you're considering buying into. In particular, I would recommend speaking with existing franchisees, and have the franchise agreement reviewed by your solicitor so that you know exactly what your rights and obligations as a franchisee are.
If you are thinking about investing in a franchise, Griffith University offers a free 'Buying a Franchise' education program sponsored by the ACCC. It's worth taking a look at this, and you can find more details at www.franchise.edu.au/home. Other useful sources of information include the Franchise Council of Australia (www.franchise.org.au) and the ACCC website (www.accc.gov.au) - click on 'Business' and follow the links to franchising.
Paul Clitheroe is a founding director of financial planning firm ipac, Chairman of the Australian Government Financial Literacy Board and chief commentator for Money Magazine.