Are you thinking of franchising your business?
28 Feb 2018
- Business Law
The modern franchise is generally attributed to Isaac Singer (of Singer Sewing Machine fame) in the US in the 1850s.
Invention alone was not key to his success as he didn’t have the capacity to train those buying his machines in how to use them nor enough capital to keep making them.
The idea of selling rights to local businesspeople to sell the machines with training added on was a game-changer. The licence fees from royalties helped with his manufacturing costs.
Dennis Martin, Director with Snedden Hall & Gallop Lawyers has assisted numerous franchising businesses – both from the perspective of the franchisor and the franchisee. Here, in part 1 of a 3 part series on franchising in Australia, Dennis, discusses what a potential franchisor must consider to make the jump from successful business owner.
In Part 2, we look at the considerations that a prospective franchisee faces; and
In Part 3, we delve into the regulations that franchisor must adhere to.
What is a franchise?
A franchise system is an agreement by which the franchisor, through training and know how, maintains a continuing interest in the business of the franchisee while the franchisee, after making a capital investment, operates under a common brand name, format or procedure owned or controlled by the franchisor.
The franchisor can expand more quickly and profitably because the franchisee contributes capital.
The franchisee gets the advantage of the knowledge and established systems and receives training and support.
Before you start
It is essential to understand that you are about to embark on one of the most important business decisions you will make. Do you have the tenacity and finance to see it through?
Your systems and skills
You will be required to adopt new management skills you perhaps didn’t need as a successful business owner.
You are about to delve into a highly regulated industry.
Early considerations will include:
- The concept of the system you want to sell,
- Understanding the new regulatory environment,
- A close working relationship with your legal and financial advisors, and
- The development of complying documents, marketing materials, advertising and training programs.
Entry will require significant sums of capital. The costs will be potentially in excess of half a million dollars depending on the type of franchise system. These costs will be over and above your normal business expenses.
How much money will you need from each franchisee in the form of up-front franchising fee and ongoing royalties in order to recoup your initial capital outlay and enable you to continue expanding?
Your start-up costs will be one of the main overheads and you should budget generously as if you fail these key roles, you will fail your franchisees and consequently never realise your potential.
Understanding your franchisees
If yours is to be a franchise system relying on geographic areas, you will need to understand the demographics and how a franchisee might tap into a sufficient number of prospective customers.
- How will you devise a training system (often an ongoing requirement) and employ trainers? How will you devise a support system and employ trouble-shooters with sufficient product knowledge whether you will deliver a product or provide a service?
- How will you devise a marketing strategy and set a marketing fee which will adequately advantage franchisees who likely will be operating in very different demographic areas e.g. city and country?
- How will you assess the qualities and financial capacity of the prospective franchisee and can you assist by introducing them to start up funding?
- How will you manage taking orders from franchisees and the shipping and supply of them where you require the franchisee to buy supplies from you or your suppliers?
In short, you need to be the consummate salesman to encourage sometimes skeptical prospective franchisees to commit to pay you significant sums of money. A demonstrated story, backed up with hard evidence, will best create a climate of trust. If your concept is sound that trust must continue as you promote the brand and offer marketing support which might include logos, in-store promotions, uniforms, digital promotion as well as radio, TV and print advertising.
How can Snedden Hall & Gallop assist?
If you are considering creating a franchise of your successful business, please contact Dennis and our experienced Business Team for advice on the best way to proceed. You can contact us for any franchising matter by email or phone on (02) 6285 8000.