10 handy tips for people wanting to buy a franchise
Naritas has been actively financing franchisees for nearly 15 years and has worked closely with some of Australia’s largest franchising portals. Over this time we’ve compiled a list of resources and tips that we’ve found helpful in educating first time franchise buyers. This article offers a lifehack to potential buyers who are looking for a place to start their journey and are seeking tips to avoid potential pitfalls.
What is franchising?
Franchising is the practice of running a business using another firm’s successful operational model. In return for a fee structure, the franchisor assigns to a franchisee the right to market and distribute established products or services under trademarked name, using established management, marketing, and other operational procedures.
In addition to the upfront set-up fee, the franchisee is normally required to pay ongoing royalty fees and/or a percentage of gross monthly sales to the franchisor, and agrees to comply with franchising procedures.
The Australian Competition and Consumer Commission (ACCC) is the federal governing body for franchises in Australia.
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There are three major types of franchise models:
- Business format franchise – This is the model that is most commonly thought of as a franchise. The franchisee is given the rights to use the franchisor’s intellectual property to operate their own business. An example of this model is a fast food outlet.
- Product franchise – This is where the franchisee sells the franchisor’s product from a wholesale or retail outlet. The franchisee is given exclusive rights to sell the product within a specific area. An example of this model is a motor vehicle dealership.
- Processing or manufacturing franchise – In this model the franchisee produces the product, while the franchisor provides an essential ingredient or “know-how” to the franchisee. An example of this model is the soft-drink industry.
Free franchise education is available to help you assess franchise business opportunities, before purchasing a franchise business.
The free online Pre-Entry Franchise Education program was developed by Griffith University’s Asia-Pacific Centre for Franchising Excellence and funded by the Australian Competition and Consumer Commission.
The program consists of five modules to assist prospective franchisees conduct due diligence and better understand their rights and obligations.
Each module takes about 45 minutes to complete and consists of video, audio and text documents, as well as additional resources and a self-assessment quiz. After completing each module, participants will receive a certificate of completion.
Topics covered in the program include:
- An overview of franchising.
- Franchise disclosure, agreements, royalties and finance.
- Franchise support services, site and territory selection, retail leasing and franchise marketing funds.
- Franchising intellectual property, the operations manual, franchisor-franchisee relationships and dispute resolution.
- Questions to ask, additional due diligence and useful business skills.
Before deciding to buy a franchise, there are advantages and disadvantages to consider. Advantages such as assistance with marketing and involvement with an established brand will help drive business. Disadvantages could include the loss of decision making autonomy and strict operational procedures.
There are many aspects to consider when evaluating a franchise opportunity, including how the business fits with your personal characteristics and situation. Many of the issues are the same as evaluating any business idea, however a franchise has other factors to consider such as the implications of the franchise agreement. Further information on evaluating a franchise can be found here.
The Franchising Code of Conduct (the Code) forms part of the Competition and Consumer Act 2010. The Australian Competition and Consumer Commission (ACCC) is responsible for ensuring compliance with the Code.
The Code regulates the conduct of participants in franchising agreements towards each other, and provides protection for franchisees in the following areas:
- Disclosure documents.
- Cooling off periods.
- Marketing fund audits.
- Dispute resolution.
For more information about how the Code will affect you, refer to the ACCC’s Franchisee Start-up Checklist.
Most franchisees will also need to lease a commercial property. Before you sign a lease make sure that you know and understand your rights and obligations under the agreement.
The cost of buying a franchise will vary dramatically depending on which one is selected. However, most franchisees will pay an initial up-front franchise fee and a continuing royalty which is a flat periodical fee, or a fee based on turnover.
Before buying a franchise, as with starting any business, you will need to think about how you will secure the funds to buy the franchise. Very few franchisors provide funding to prospective franchisees, however, most major financial institutions have online information about franchising and applying for finance. If you would like to see a list of franchise systems that Naritas can provide expert credit assistance for, please refer here. Further information on alternative finance options for franchising (including leasing, equity release options & venture capital) can be found in our support portal.
The initial franchise fee you pay when buying a franchise, along with any renewal or transfer fee, form part of the capital cost base of the business and cannot be claimed as a tax deduction. However, as they form part of the cost of acquiring the franchise, they may be relevant in calculating any capital gains tax liability if you sell the business.
Ongoing fees that are payable to the franchisor such as administration fees, royalties, marketing levies, and training fees, are generally tax deductible, as are other operating costs of running the franchise business.
The Australian Tax Office (ATO) has more information about franchising and taxation. It is recommended that you speak with an accountant or taxation adviser who has specific expertise in franchising for information regarding this complex area of tax law.