An Overview of Franchising in Australia.

(Courtesy of The Commonwealth Bank)

There are two main types of franchises:

1.         Product and trade name franchises

These are essentially exclusive branded distributorship arrangements whereby the franchisor, in exchange for fees or royalties, provides either the product (as in new motor vehicle distributorships), or the essential ingredient or know-how to a manufacturer (as in soft-drink bottling), for distribution in an exclusive territory under the franchisor's trademark.

2.         Business format franchises

Business format franchises differ from product and trade name franchises through the imposition of a business format, or an entire system for conducting a business.  This can include a marketing strategy and plan; image; comprehensive operational standards, systems and formats; operating manuals; training; quality control and a continuing process of assistance, guidance and supervision.

As a result, there is an ongoing business relationship between franchisor and franchisee that benefits both.

The franchise agreement

The relationship between the franchisor and franchisee is a contract.  The franchise agreement is the formal document that sets out the parties' rights and obligations.  It is the ultimate reference point for the operation of the relationship and, given the intricacy of the relationship, is usually a long and complex document.

It will, typically, record the parties' agreement in relation to key issues, such as grant of franchise, term and renewal, territory and location, names and marks, premises and equipment, products and services, fees and payments, the franchisor's obligations, the franchisee's obligations, advertising and reporting, inspection and audit, transfer, termination, and restrictive covenants.

The operations manual

The essence of franchising is the replication of the franchisor's entire business system.  The comprehensive blueprint for the operation of the franchised outlet - the detailed rules, procedures, specifications, standards, formats, policies - is usually set out in a confidential operations manual or set of manuals.

The franchise agreement will ascribe contractual effect to the manual so that breach of the operation requirements is a breach of the agreement.  Given that the operations manual is a "living" document that must be revised and amended from time to time to accommodate system developments, the franchise agreement will usually give the franchisor the right to amend the manual.

Franchising in Australia

Franchising has assumed such a profile in the Australian marketplace that it is difficult to imagine the Main Street or local shopping centre, without franchised outlets.  The concept of "cloning" business outlets was virtually unknown until the early 1970s, when the pioneering US fast-food systems introduced this dynamic method of business operation to the local marketplace.  The development of business format franchising since then has been impressive.

Today, such franchising has expanded to include virtually every product and service business, and has assumed major economic, commercial and social significance.  It is now the format chosen by many Australian entrepreneurs to expand and develop their businesses.  The great majority of franchise systems operating in Australia are homegrown, and increasing numbers of Australian franchisors are successfully taking their systems overseas.

Looking to the future

Australia today can rightly claim to be one of the leaders in the global franchising community.  The continued growth and development of business format franchising will be driven by a number of factors:

• Its close association with the rapidly developing services sector.
• Its ability to exploit and service niche markets.
• The increasing demand for convenience and standardised quality, and
• The increasingly difficult business environment for independent small business operations.

Understandably then, the Australian franchising sector has entered the new millennium with confidence and enthusiasm.  Today's prospective franchisees can also take comfort in the new regulatory environment for franchising - now the most comprehensive in the franchising world.

Evaluating a franchise opportunity

Investment in a franchise represents a significant commitment in financial resources and time.  It is a decision that should never be taken lightly.  It requires careful consideration and advice on a number of factors that will determine your success.

1. The business concept
You must be satisfied with the basic commercial viability of the business being franchised.  Franchising is the replication of an established business concept.  It is not a magic formula that will save a bad business concept, product or service.  The concept must be attractive, there must be a b demand for it, and it must be unique or have a distinct corporate image.

2. The franchise system
The franchise system is the total "package" provided by the franchisor - the extent of the rights granted, the services provided, the business conditions, and the detailed rules, specifications, procedures, standards and policy documented in the franchise agreement and the operations manual.  Its practical viability should be established through an existing network.

3. The franchisor
The ongoing commitment, support and assistance of the franchisor will be a key factor in the success of the franchised business.  You must carefully consider whether the particular franchisor is one with whom such a significant long-term relationship should be forged.  Their track record and experience, commitment and future plans are among the factors that you must carefully assess.

4. The financial equation
As a franchisee, you will need to pay initial and, in most cases, continuing fees for the rights granted by the franchise agreement.  Detailed financial and business planning, and specialist advice, is necessary to ensure that the business can support these expenses in addition to the usual initial and ongoing costs of establishing and operating a business.

5. Your own suitability
You need to consider whether you've got what it takes to manage a franchise.  In addition to the usual challenges of running a business - motivation, family support, hard work, people skills, and so on - franchising imposes particular challenges.

Key factors in success and failure.  b, viable and profitable franchise systems incorporate a number of essential features:

• A sound product or service with ongoing potential.
• A sound and successful business format that can be taught and replicated.
• A unique selling proposition.
• A distinctive image.
• An established and recognised brand name or trademark.
• An appropriate franchisee selection method.
• Structured growth and network development.
• The necessary training support, advice and assistance.
• Proper auditing and enforcing of the system image, standards, procedures and controls.
• Effective communication.
• A relationship structured, negotiated and conducted in good faith, and
• b, competent and ethical management.

Other points to consider

Franchising of course cannot quarantine franchisees from normal business risks and difficulties.  Not even the most successful franchise systems can claim 100% success for each franchise outlet opened.  In particular, you should consider the following:

• Remember that success or failure is largely dependent on the quality of the franchise system provided by the franchisor.
• Individual franchisees may fail within otherwise successful systems because the location proves not to be viable, the personality of the franchisee is incompatible with the demands of the system or the franchisee has not properly managed the business.
• In good franchise systems, the franchisor will have developed location analysis tools, franchisee profiling techniques and training programs designed to minimise potential problems.  The franchisee nevertheless retains a responsibility to exercise due diligence in relation to all aspects of the industry, the franchisor and the system.
• The breakdown of the interdependent relationship between the franchisor and the franchisee is also a significant factor in franchisee failure, and it is your responsibility, as well as the franchisor's, to maintain b and effective communication.

Is a franchise right for you?

Taking on a franchise is a big commitment - sometimes a life-changing one.  When considering a franchise, ask yourself the following questions:

• Are there any plans for expansion and growth in the region/area I am looking at?
• What level of support and training will I be given?
• How much control will I have?
• What are the renewal and termination terms and conditions?
• Am I genuinely enthusiastic about the product?
• Can I get the finance I need or am I financially able to buy the franchise?
• Am I buying a franchise for the right reasons?
• Am I buying a franchise just because I'm fed up with working for somebody else?
• Will the commitments and responsibilities of running a franchise conflict with my lifestyle or family commitments?
• Do I have the full support of my family?
• Will I be able to cope with all the day-to-day issues associated with running a business?
• Do I have the management skills I'll need to motivate my employees?
• Do I have the appropriate accounting and legal support?

Advantages and disadvantages

Key features of business format franchising

• Provision of an entire business concept
• Initiation and training in all aspects of running the business, according to the concept.
• Continuing assistance, support and guidance.

Advantages for franchisees       

• Eliminates many of the risks inherent in opening a new business.
• Enables you to operate your own business using the provided business system and support, without previous experience.           
• Gives you access to a range of services, which may include regular field visits, networking, new product development, advertising and marketing, group buying advantages, management and accounting advice, services and so on.  These factors may reduce the commercial risk.      

Disadvantages for franchisees

• Loss of independence.  The franchisor generally has significant control over your business to ensure that their concept and operating systems are strictly adhered to.
• Standardisation is vital because one bad franchisee can bring the entire system into disrepute, and because in many franchise operations uniformity of service is one of the main customer attractions.

FAQ

How much can I borrow?  Or, can I fully fund the purchase of a franchise?

It depends on a number of different factors including the:

• Type of franchise business and the cost of purchase
• Profitability and ability to repay/service debt (business and personal)
• Equity in the business
• Additional security
• The ability of the business to provide a reasonable income to the shareholders/owners.

nsider lending against the value of the business for an accredited franchise system.  Lending above approved margins will require supporting security to be provided.  For unaccredited franchise businesses, we will consider lending up to 50% of the "hard cost" of the business without recourse to other additional security.

What do you mean by "accredited franchise system?"

An accredited franchise system is one that has been reviewed by the Commonwealth Bank with consideration given to variables such as:

• Years in operation and in franchising
• Number of franchisees
• Profitability
• Support from franchisor to franchisees, etc.

If the Commonwealth Bank accredits a franchise system we will apply a lending margin.  We value the business being acquired and will lend up to a predetermined ratio, subject to the franchisees ability to service the debt.  The benefit is that we value and lend against the business, rather than against other personal assets.

Do I need a house as security?

Not necessarily.  Because we understand the business, we acknowledge its value and will lend against that value.  If you require borrowings above the threshold for your business, we will require supporting security for that amount.

Where do I start, and what is the process?

You should consider a business in industries you have a passion for, or expertise in, and weigh that up against your expectations from the business.

The website of the Franchise Council of Australia  (http://www.franchise.org.au/) contains detailed information.  You should also talk to as many "players" involved in your chosen industries, as possible i.e. franchisors, existing franchisees, franchise consultants, as well as business brokers, accountants and solicitors, etc.  Once you have a clear picture of what business you are interested in, talk more specifically with the franchisor and franchisees.
Develop your business plan around the feedback and ensure you understand as much as possible about your business.  Once you have identified the opportunity you wish to pursue, talk to your banker or accountant about the appropriate way to fund the purchase.

What are the most successful franchise businesses / what do you recommend?

Each franchise system appeals to different people for different reasons.  It is recommended that you carry out your own due diligence on the system that interests you.  When doing so, you should consider factors such as the lifestyle requirements of the business, the expected return on investment and effort, your passion for the business, and so forth.

Who will manage my relationship / who will I deal with?

The Commonwealth Bank Franchising unit has experienced Relationship Executives and Relationship Bankers, who are responsible for managing all your banking requirements on a continuing basis.  These teams are located in Sydney, Melbourne and Canberra.

What other products and services can you help me with?

As a client of Commonwealth Bank Franchising, you have the whole Commonwealth Bank network available to meet your business and personal needs.  This includes our Global Markets (risk management and investment advice), insurance and superannuation services, asset finance specialists, working capital services (transactional banking, EFTPOS, merchant facilities, etc.), trade finance, plus a full range of personal lending and investment opportunities.

What costs are involved?

It depends on which products you will require.  Our lending facilities are very competitively priced, with easy-to-understand terms and fees.

What are the benefits of dealing with the Commonwealth Bank?

The franchise industry is an important sector of the Australian economy, with unique features and requirements.  The Commonwealth Bank has a long history in meeting and exceeding the expectations of business clients, and franchising is no exception.  Our franchise team has expertise and experience in the industry, which enables it to:

• Better understand your business.
• Provide prompt and accurate responses, and
• Take a proactive role in managing your banking requirements.

Further information

The Franchise Council of Australia (FCA)

The FCA is the peak industry body for the Australian franchising sector.  Its members are franchisors, master franchisees, franchisees, advisors and service providers to the franchising sector.  The prime objectives of the FCA are:

• To develop a vital, b and financially viable franchising sector.
• To advance the interests of members in Australia and in special interest markets such as the international franchise community, small business forums and shopping centres.
• To foster, among consumers, governments and the business community, a broad understanding of the economic importance of having a b franchising sector in Australia, and
• To design efficient, identified, value-added services to members and assist them to be more effective in franchising.

The FCA has published a number of guides for participants in the franchising sector and also publishes the Franchising Yearbook and Directory, containing information on franchising and franchise systems.  They have also introduced a program for prospective franchisees, Franchising - Is It for You?  Which is offered through its state chapters, plus an accredited franchise executive education program.

Website: www.franchise.org.au

The Australian Competition and Consumer Commission (ACCC)

The ACCC is the body responsible for administering the Trade Practices Act 1974; the legislation regulating restrictive trade practices, fair-trading and consumer protection.  The ACCC has a central role in the franchising sector through its responsibility for enforcing the Franchising Code of Conduct.  The ACCC also has an important educative role and has published a range of booklets and guides of particular relevance to prospective franchisees:

• The Franchisee's Guide: A Guide to the Franchising Code of Conduct
• Small Business and the Trade Practices Act: A Practical Guide for Small Business.

Both guides are available from ACCC offices and, together with more detailed information on aspects of the Trade Practices Act, from the ACCC website.

Website: www.accc.gov.au