Why franchising makes sense

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Let’s start at the beginning. Franchising as a concept has been around for decades and began, as many ideas do, in the US. The earliest franchising was product franchising which, according to online encyclopedia Wikipidia, was initiated by Isaac Singer to distribute his sewing machine in the 1850s; Coca Cola’s product expansion was a more successful early franchise. Modern franchising began in the 1930s with quick service restaurants and the concept has now infiltrated 70 countries. Franchising can embrace vehicle dealerships, product distribution, a co-operative of retailers purchasing from a wholesaler, and the most common structure, a standard business format. And the standard business format is what we are dealing with here.

At its heart, franchising is all about individuals buying into an existing business system and profiting from the expertise, branding, resources and training provided by an organisation which has already ironed out many of the difficulties of trading. It is about running and owning, in many cases for a specified time, your own business and having some level of control over what you do and when you do it; although the degree of flexibility will vary from system to system with some deploying quite rigid rules of operation, other businesses allowing for greater individual input.

Franchising means starting up your own business with brand awareness for the product or service on offer already established; the measure of branding is heavily dependent on the length of time the business has been in operation and how strong the marketing collateral has been — in general the greater the number of franchises in a system, the stronger the brand recognition will be.

There are some strong brands in the Australian franchising arena and beyond; the following brands include some level of franchising in their business or are, like the Franchisor of the Year 2008, 7-Eleven Stores, entirely franchise focused and have all recently been featured in the BRW Australia’s top 1000 enterprises (judged by revenue above $242.2 million). In descending order of revenue these companies are ANZ Banking Group, Caltex Australia, Harvey Norman, Flight Centre, 7-Eleven Stores, McDonald’s Australia, Mitre 10 Australia, Goodyear, Franklins Supermarkets, Quick Service Restaurant Holdings (which includes chicken brands Red Rooster, Chicken Treat and Oporto), Yum! Restaurants Australia (KFC and Pizza Hut), Bridgestone, Gloria Jean’s Coffees, Bing Lee Electricals, Macpherson and Kelley, suggests everyone knows that franchising provides access to brands and resources but it also offers other tangible benefits for both franchisors and franchisees. “Like any other small business owner, franchisees are in control of their own destinies. But franchisees have the advantage of having tried and tested systems in place to help them succeed. If, for whatever reason, the franchise business is struggling, then the franchisee can also rely on the experience of the franchisor to help turn the business around. "Particularly in these tougher economic conditions, business owners want someone who has been there and done it before and can give assistance or make suggestions about how to overcome any issues."

She believes an experienced and franchisee-focused franchisor can be all that stands in the way of a failed business. Franchisees should be encouraged to seek help and franchisors should be on the look out for the early warning signs in a franchisee who is not performing, she says.

So what are the reasons for franchising to continue to attract new companies and new blood? Says Piniuta, from the perspective of someone looking to become a franchisor, it is one of the quickest ways to expand and achieve national brand exposure. Fellow lawyer Laks-Belzycki reflects on the role of franchising in company expansion. “We have worked with many franchisors that have started franchising in order to overcome the burden of having to employ and maintain very large workforces, which requires a substantial financial investment, in order to foster and support growth. Through franchising, responsibility for employees and related logistics can be shifted to franchisees, which gives the franchisor the ability to work on the business and brand and in supporting expansion through franchisees rather than managing a workforce.

“Franchisees are at the coalface and are better equipped to manage the day to day running of each territory or business unit rather than a franchisor attempting to do so from a (sometimes distant) head office or through complex (and costly) logistical arrangements and management structures,” she adds.

Rules, rules, rules

Despite the negative publicity that can surround franchising, the sector is highly regulated. There are challenges in working within a regulated industry. And, says Piniuta, it can be expensive to operate in the legal constraints. However, there are some positives for franchisors and franchisees alike. "For prospective franchisees, it reduces the risk of the unknown as the franchisor is required to provide them with a disclosure document prior to them paying non-refundable money or entering into a binding franchise agreement.

"For the franchisor, this means prospective franchisees understand the franchise system, what is expected of them and what support the franchisor is willing to give prior to them signing a binding franchise agreement.

“In addition to this, franchisors are obligated to keep a ‘tidy house’ due to the fact that it is nearly impossible for them to be able to comply with the Trade Practices (Industry Codes —Franchising) Regulations 1998 (Franchising Code) without setting up watertight pre-franchise processes and procedures.”

While there might be rules and regulations in place (a recent inquiry by Federal Parliament has resulted in recommendations for statutory obligation for good faith negotiations between franchisors and franchisees, and fining breaches of the code of conduct) there are no guarantees that a franchise business will be successful; there are risks attached, as with any business. But franchising provides a tried and tested structure, franchisor support and a network of other franchisees to learn from. That’s a good start.

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