To franchise or not to franchise

It’s a question business owners have asked themselves – should I franchise my business? With new brands coming into the the franchising sector, and others deciding that franchising is not the right path, it’s a key decision for any company. 

Rob Toth, partner at Marsh & Maher, says the first thing business owners need to consider is how established the concept is. Franchise-ready brands are generally:

  • Undercapitalised but looking for growth, not looking for investors.

  • Operating a number of outlets with managers who could be business owners.

Benefits of franchising your business

The benefits of franchising can be financial but also provides the opportunity for franchisors to mentor and develop franchisees. 

“You can expand rapidly because you’re not funding the growth,” says Toth.

Other benefits:

  • Franchisors can also gain gross sales on turnover on royalties not franchisees’ profit.

  • Franchisors are freed from the responsibility of running each outlet and can put their energies into supporting franchisees instead.

  • The business can build value as an asset – franchises are a significant capital asset that can be sold.

When it’s not the right time

Toth says business owners should think again if they are “in a market that’s volatile and not sustainable”.

This is because from a consumer’s perspective, the concept could be a short term fad. It’s important that, business owners steer clear of franchising if they don’t have the resources or the funding to set up a franchise. This includes internal resources that allow for a head office or support office to be established.

“You will get a franchisee who won’t follow the model and then will want to sue you if it ends badly,” says Toth.

“You need to have thick skin. If you’re risk averse, you shouldn’t be a franchisor.”

4 things budding franchisors need to do

1. Conduct financial analysis: potential franchisors should read up on:

  • Demographic analysis

  • Royalty and fee structure of the model so that both are working for the franchisee and reducing the risk of liability for the franchisor

2. Gather enough capital

Toth says potential franchisors need to have enough cashflow to establish a business. To get financial and legal documents and to carry out demographic analysis to set up and establish a franchise can cost between $40,000- $60,000.

3. Check if it’s a fit

Franchisors need to have the right personality and mindset to be able to work with franchisees. Toth says business owners who are too close to their business can struggle to let go. If this is the case, he advises potential franchisors to “bring in the right people to run the model”.

4. Do your homework

Franchisees have to do it, home buyers have to do it… research! Toth advises potential franchisors to speak to certified specialists (legal and financial) and the Franchise Council of Australia.