Franchising - a popular option
AS we head toward the holiday season, many Australian workers are planning their annual leave. It can be a time when our thoughts turn to saying goodbye to the boss for good, and taking up the option of self-employment.
Buying into a franchise is a popular alternative to starting a business from scratch but it's not a guaranteed path to prosperity.
Australia's franchise sector turns over annual sales of around $128 billion, and investors have a choice of over 1,000 different franchise options from fast food outlets to pet grooming, juice bars and real estate.
There is an equally wide range of costs involved. The purchase price of a franchise can vary from a low of around $5,000 to in excess of $1 million. The higher the profile of the franchise and the greater its commercial success, the higher the price tag. In addition, some franchises like McDonald's require a significant investment in capital equipment, which adds to the cost.
Apart from the upfront cost of buying a franchise, the "franchisee" (the person buying into the business) can expect to pay ongoing royalties and service fees to the franchisor (the parent company). These vary from about 1% to 35% of your gross revenue. Other costs can relate to the mandatory purchases of company supplies including accounting systems, uniforms, signage and ongoing supplies.
In exchange for your money, franchisees gain the (hopefully) proven business formula and established brand name of the franchisor, as well as cooperative marketing, bulk buying and training and assistance from head office. Capable franchisors may also save a failing franchisee by arranging a sale of the business or buying it themselves to avoid damage to the public image of the business.
These are all significant benefits, and they can lead to a lower rate of business failure. Research by one Australian university found franchises are 2.5 times less likely to fail than independent small businesses.
However running a franchise is not for everyone. As a franchisee you're expected to operate within the strict framework laid down by the franchisor. This means giving up some of the freedom of traditional self-employment, notably the ability to call your own shots.
If you're reasonably sure a franchise is the right choice for you, it pays to research the market thoroughly thinking about the type of industry that would suit your skills, interests and budget. A good franchisor will be happy for you to speak with existing franchisees for their feedback, which is something I recommend you do.
Always have your accountant and solicitor review the franchise agreement closely before you sign it. These contracts can be complex, and you need to be quite sure about what you're getting into.
Finally, be aware that in some cases franchisees are required to undergo lengthy training periods, often without pay. Where this is the case you will need a pool of cash to support you through weeks, even months, of little or no income.
A good place to find further information about franchising is the Franchise Council of Australia website at www.franchise.org.au
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. Visit www.paulsmoney.com.au for more information.