Open a Franchise

Last updated 08 April 2019
Australian Franchise Guide 2019
Franchising is a popular choice for many entrepreneurs. According to the Franchise Council of Australia, franchising is a $146bn sector and there are approximately 1,200+ different franchise systems, over 800,000 franchised businesses and the sector employs more than 500,000 people.

Opening a franchise is an excellent way to hit the ground running when looking to start your own business. If you are eager to run your own business but struggling to come up with an original concept, or want to reduce the numerable risks and unknowns in starting from zero, locating a franchise that you believe in allows you to fast-track the launch and gives access to a network of operators who can assist and mentor you in your journey.
How Does Franchising Work?
The definition of a franchise is simply an endorsement by a business to another party to carry out specific commercial activities.

More specifically, in a franchise agreement, the owner of a brand (the franchisor) licenses the right to use its brand and business model to a third party (franchisee). A franchise agreement is usually set for a defined period of 5 to 7 years.

The franchisee pays the franchisor a fee which may consist of an upfront payment and/or an ongoing fee, usually calculated as a percentage of sales. The franchisor may also sell some elements necessary to operate the franchise, such as products or services, to the franchisee.

In addition to the brand and business model, the franchisor will often assist with marketing, training, site selection and mentoring. Some larger franchisors are also able to assist with financing the franchise.

The most famous example of a franchise business in the world is McDonald’s. Over 90% of McDonald’s outlets worldwide are franchises. Other well-known Australian franchises include Anytime Fitness and Baker’s Delight.
Choosing a Franchise
It is important to find a franchise that complements your existing skills, experience, personality, lifestyle requirements and budget. Running a business can be a physically and mentally challenging experience and to remain motivated you want to find a model that suits you well.

When choosing a franchise business, consider the following;
1
Find a product or service you believe in.
Your passion for the product or service will help drive sales and ensure the success of your franchise. Read up on the product or service to ensure that you know exactly what running the business entails including the more mundane aspects such as operating locations and operating hours.

For instance you wouldn’t want to open a bakery and only afterwards find that you can’t cope with the long hours or a gardening business if you don’t like spending your days outside.
2
Research the broader industry that the franchise operates in.
How fast is the industry growing? Are there any potential new entrants to the industry that may disrupt the current state of affairs? Is the industry at risk from disruptive technologies? Ensuring that you are comfortable with the near- and medium-term outlook of the industry landscape is important to avoid unwelcome surprises down the road.
3
Analyse your existing competitors.
What do they do well and what do they do poorly? How have they overcome past operating challenges? Are there any barriers to entry to prevent other competitors from entering this space?
4
Speak to existing franchisees and learn their experience.
Learn if they have been happy with the structure and support provided by the franchisor. Discuss their experience in the first few years of the business’s existence, what where the greatest challenges?

How quickly were they able to reach profitability? What would they have done differently? Walk through a shopping mall during a quiet time, call small businesses or explore online forums to find existing franchisees. People as a rule love to talk about their business.
5
Search media articles and public records for complaints or judgements against the franchisor.
This will not only give you insight into how they have treated franchisees in the past but also how they settle disagreements with franchisees.
Should You Start a New Franchise or Buy an Existing Franchise?
If you are keen to start operating immediately, buying an existing franchise (also called franchise “resale”) provides you with a turnkey business with an established customer base and existing systems, facilities and equipment. You avoid surprise expenses in the set-up process and no delays in starting operations. If the franchise has strong operating cash flows, it should also be possible to borrow money against those cash flows to finance the purchase.

However, be aware that if you look at buying an existing franchise, the franchisor still needs to approve the purchase so you will save no time in terms of providing references, financials, and personal history. You will also need to go through the financials of the franchise extremely carefully to ensure there are no outstanding obligations and check on any lease expiries etc. that could cause a significant increase in costs in the future.

It may be tempting to purchase a failing business cheaply with the intention of turning it around but this is a risky strategy as there may be a very good reason for why the franchise is not working ranging from a poor location to overly onerous franchise fees paid to the franchisor or lack of support from the franchisor, all of which are difficult to change.

There are many ways of finding a franchise for sale. We recommend you attend franchise conferences such as the annual National Franchise Convention organized by the Franchise Council of Australia to build your network within the franchising industry. Franchises for sale are also listed on various websites ranging from Gumtree to SEEK or franchise-specific websites including Inside Franchise Business and Franchise Direct. Enlisting a business broker to help you locate a franchise to buy is also worthwhile as an experienced broker will have contacts in the industry and know what businesses may be interested in selling but are currently not listed. Your broker can also help you weed out the poorly performing franchises and help you negotiate the best possible purchase price.
Consider the Total Costs of Franchising
As an entrepreneur, you will want to be compensated for both your time and your financial investment. A successful, established business should typically return around 12-15% on capital after all costs and salaries. You do not want to find yourself in a situation where franchise fees are eating into your profits or where you are forced to work without a salary longer term.

There can be many layers of costs to a franchise agreement, your financial forecasts need to consider the total fees paid to the franchisor in addition to your normal operating expenses. Some of the most common costs specific to franchises include;
Franchise royalties are often calculated as a function of sales, typically 5-6% but can be as high as 15%. Some franchisors charge a fixed fee irrespective of sales levels.
When starting a franchise, many franchisors charge an initial franchise establishment fee. These fees vary greatly from $5,000 to $1 million depending on the type of franchise and the franchisor.
In the event that you are buying an existing franchise, a transfer fee may be charged when you transfer ownership.
You may be required to purchase products or services from the franchisors or affiliated companies. It is essential to check that these products or services are priced competitively.
The franchisor may require you and your staff to do additional training before working and will then charge training fees.
Many franchisors charge marketing fees to support franchise-wide advertising campaigns.
Audit fees are charged for any financial audits that the franchisor deems necessary.
When your contract expires, you may be charged a renewal fee upon contract renewal.
What are the Risks of Opening a Franchise?
When signing a franchise agreement and opening a franchise, the franchisee exposes themselves to both the ordinary risks of operating a business as well as risks that are specific to their position as franchisee. It is very important to fully understand these risks before committing to any franchise operator and to ensure that you have had both legal and financial advice. Franchise contracts are often worded in the franchisor’s favour so having the right advice from a lawyer, business broker or finance broker can ensure that you negotiate the best terms for your business.

Some key considerations when starting a franchise which should be discussed with your advisors include;
A franchise contract is a fixed term contract ,often 5 to 7 years, and it can be very difficult to cancel the contract before its expiry. While you may be able to sell your franchise before the end of the contract, the franchisor has to approve the sale and may charge cancellation and transfer fees. You risk being stuck having to continue to operate a loss-making business until the franchise contract expires.
The fees and charges due to the franchisor are either fixed or in the case of royalties and product and service purchases a function of your sales volumes. This means that the franchisor will be making money and demand payment even if you are making operating losses. As the contract is fixed term, you may be forced to continue operating and paying fees despite making operating losses for the full length of the contract.
Any bad publicity about the franchise brand, even matters out of your control such as poor operating practices by other franchisees or the franchisor, may impact your business negatively.
Unless you have specified an exclusive operating area in your contract, you are at risk of territory infringement , a situation where the franchisor allows other operators to start competing businesses near you.
A franchise contract is not automatically renewed and you are at risk of increased costs when negotiating to renew or extend your franchise contract.
If the franchisor finds that you are in breach of the contract, they may cancel the franchise contract. Franchisors normally have to follow the Franchise Code in providing reasonable notice etc. but under some exceptional circumstances, the franchise can be cancelled literally overnight. It is vital that you read the fine print of your contract and understand what circumstances would result in a cancellation of the contract.
If you are forced to close the franchise early to avoid insolvency, the franchisor can chase anyone who has provided a personal guarantee in the contract for the outstanding franchise fees. This means that you or your guarantors risk losing personal assets. This risk may be mitigated by using legal structuring to purchase your franchise, such as trust structures.
In the event that the franchisor becomes insolvent you risk losing your brand, your supplier and if the franchisor holds your lease then you may even lose access to your premises.
Franchise Finance
Finding finance for a start-up franchise can be challenging. The large banks have specific franchise-focused business bankers who can assist you throughout the process. Alternatively, a finance broker can help you explore both banks and non-bank finance companies and understand what type of loan suits you best.

The types of loans more commonly extended to franchises include;
1
Franchise Finance Loans
A franchise loan will normally fund the franchise fee, stock, training costs and business assets necessary for setting up a franchise. Lenders work with the larger franchisors, who have established track records, to provide finance for their new franchisees. Lenders believe that the value in these established franchises, including their brand and operating practices, will reduce the risk of the start-up. The lender will estimate the value of your franchise based on its experience lending to other franchisees of this brand in the past. The amount you can borrow will also be a function of the forecast EBITDA of the business as laid out in your business plan.

If you are purchasing an existing franchise with strong operating cash flows, you may be able to obtain a franchise loan against those cash flows.
2
Secured Business Loans
The cheapest and most readily available loan for franchising is obtained by borrowing against your personal property or a property owned by your business, also known as a secured personal or business loan. You may also be able to borrow against your franchise if the franchise holds significant assets. The loan term can extend to the entire length of the franchise agreement (if the loan is secured against the business) or longer if the loan is secured against a personal property.

Read more about secured business loans here.
3
Unsecured Business Loans
It may be possible to get an unsecured business loan to cover part of the costs of starting a franchise. The advantage of unsecured business loans is that you avoid having to use a property or the business as security but you will pay a higher interest rate and higher fees.

Learn more about unsecured business loans here.
4
Business Line of Credit
A business line of credit can help provide additional working capital for your franchise as you ramp up operations. The business line of credit gives access to funds as an when you need it and is usually secured by a property or other substantial assets.

Learn more about business lines of credit here.
Australia’s Largest Franchises 2019
We have ranked the largest franchises in Australia based on the number of outlets as reported by the franchisor. The list is topped by Subway, IGA and BP with a total of over 3,500 outlets combined.

Some key considerations when starting a franchise which should be discussed with your advisors include;
Franchise Brand Industry Outlets
1 Subway Food services 1,300
2 IGA Supermarkets 1,251
3 BP Australia Service stations 1,000
4 McDonald's Food services 970
5 Domino's Pizza Food services 700
6 7-Eleven Convenience stores 680
7 Ray White Real estate services 680
8 KFC Food services 640
9 Baker's Delight Food services 580
10 Cellarbrations Liquor stores 557
11 LJ Hooker Real estate services 550
12 Anytime Fitness Fitness services 500
13 IGA Liquor Liquor stores 466
14 TSG Food services 460
15 Hungry Jacks Food services 420
16 Terry White Chemmart Pharmacies 406
17 Priceline Pharmacy Pharmacies 400
18 Gloria Jeans Coffee Food services 400
19 The Coffee Club Food services 400
20 Harcourts Real estate services 392
21 FoodWorks Food services 370
22 Red Rooster Food services 360
23 Telstra Stores Retail services 360
24 Bottle O Liquor Pharmacies 356
25 Optus Yes Shops Telecom retail 353
26 Mitre 10 Retail services 313
27 Chemist Warehouse Pharmacies 300
28 Lenard's Food services 300
29 SPAR Supermarkets 300
30 Friendly Grocer / Eziway Supermarkets 285
31 Pizza Hut Food services 270
32 Raine & Horne Real estate services 270
33 Kumon Education 269
34 Donut King Food services 260
35 Boost Juice Food services 260
36 Nando's Food services 260
37 Mister Minit Retail services 247
38 Muffin Break Food services 200
39 Home Timbre & Hardware Hardware stores 198
40 Just Cuts Retail services 190
Source: This information has been collated from primary sources including corporate presentations and websites and is valid as of March 1st 2019.
Get Professional Advice
Get professional advice. Locate an accountant, lawyer, real estate agent or business broker with experience in franchising and who is ideally a member of the Franchise Council of Australia to assist in your due diligence. Spending a relatively small amount of money and time upfront to ensure that you have had the best advice and done all your due diligence thoroughly will, with overwhelming likelihood, save you a lot of money and headache in the long run.

A lawyer will help you to go through your franchise contract in detail and fully understand your rights and commitments. Your lawyer will also explain your legal protections under the Franchising Code of Conduct and Australian law.

When buying an existing franchise, a skilled accountant is essential in combing through the company’s accounts and understanding its debt obligations. If you are starting a new business, your accountant can assist in understanding how the various costs and franchise fees will impact your returns over time.

If your business requires a bricks and mortar outlet, a real estate agent can assist in locating a suitable site.

Finally, a business broker can help you locate opportunities you were not aware of, has connections with other franchisees that you can leverage off, and help you negotiate the best deal possible with the franchisor.
In Conclusion
Opening a franchise can set you up as a business owner and your own boss while still having backing, support and know-how of a country-wide or even worldwide operation. The franchise model allows you to fast-track your opening and solves many of the trickier questions for would-be entrepreneurs identifying a product or service in demand and branding.

It all comes down to research, advice and execution. A few days or weeks of intense research can ensure that you avoid many of the pitfalls discussed above and find a franchisor that you can work well with. Obtaining the right legal, accounting and broker advice will assist you in negotiating the best deal possible, help you understand all aspects of the franchise contract that you sign and support you in finding the best franchise finance to secure the financial aspects of your investments. Finally, once the franchise agreement is signed, it is up to you to prove that you can execute on the concepts. Some franchisees succeed and some fail under the same brand. The difference often comes down to the dedication, skill and grit of the individual operator.

If you would like to discuss your franchising ambitions, particularly when it comes to your finance options, Broker.com.au is here to help.
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