The Risks and Rewards of Franchising your Business
The recent demise of Pie Face is a clear example of the risks associated with franchising your business, even if you had a successful business model prior to franchising. It is important to be aware of these risks, as well as the rewards – whether you are considering franchising or are already an established franchisor.
One of the major drawcards of franchising is access to franchisees’ capital. Typically, it is the franchisee who pays for the establishment costs of the business, such as the fit out, purchase of equipment and stock. Payment of an upfront fee to the franchisor also provides an injection of cash flow to the franchisor. This capital can allow the franchisor to rapidly expand the franchise system where it otherwise may not have been able to. Following expansion, an established franchise system means the franchisor has greater access to economies of scale, such as being able to negotiate reduced rates with suppliers, insurers and landlords.
Whilst the usual risks apply, including economic downturn, increased competition, cost of goods and rent, franchisors face additional risks that are peculiar to franchising. Franchising is centred on the franchisor’s brand and therefore the franchisor’s reputation and intellectual property are paramount. Damage to this brand can have ripple effects across the whole system. Further, disputes with franchisees and investigations by the ACCC can deplete the franchisor’s time and resources. The introduction of penalties under the new Franchising Code of Conduct from 1 January 2015 will only further magnify the risks.
Speaking to your lawyer and accountant, both at the outset and on an ongoing basis, will prove invaluable in terms of minimising these risks. It’s also a good idea to conduct ‘health checks’ on your business every few months or so (again, in conjunction with your lawyer and accountant) and deal with any issues head on and as soon as they arise. If these risks can be managed, the rewards of franchising will certainly be seen.