Using franchising as a growth vehicle ? Australian Business Solutions

By Phil Blain.

Franchising is undoubtedly a massive success in Australia; fourteen cents in every dollar spent now passes through a franchised business, with Australia and New Zealand being the most franchised nations per capita in the world. Consequently, any organization looking for an expansion strategy would be very short-sighted not to consider franchising.

Franchising is not the right model for every business, so the starting point must be to ask the question, how do I qualify?

1. Your business must be proven. All too often I see people who have some wonderful ideas but the concept has never been tested and it is uncertain how the public will accept the concept once it comes to fruition. Generally, the business should have been running for at least a year and preferably longer, or seasonality impacts are unknown and, probably, all of the bugs have yet to be ironed out.
2. Your business must be profitable. This sounds obvious, but franchising is not a way to hive off unprofitable businesses or sections of business. Nor it is the answer to establishing a quick route to market rather than employing a sales force.
3. Your business must franchise for the right reasons. Franchising is not about selling fifty franchise units at $50,000 each and riding off into the sunset with the resulting $2,500,000! The fact of the matter is that by the time all costs are taken into account, the upfront franchise fee is far from being a major profit source.
4. Your intellectual property must be protected or there is nothing to franchise. Are names, logos and companies all registered with the appropriate authorities? Irrespective of the decision to franchise, these are essential for any business.

So if you think your business qualifies, what exactly is a franchise? There are numerous legal definitions but, in very simple terms, franchising is a method of getting a product or service to market. The franchisor (whose business it is) grants rights to franchisees for the use of the intellectual property for which they normally pay an ongoing fee. Not rocket science really is it?

The area of law that covers franchising in Australia is the TPA (Trade Practices Act), which most businesses leaders have some familiarity with. Within the TPA is the Franchising Code of Conduct that is administered by the ACCC (Australian Competition and Consumer Commission) which lays down four key points to decide if a business is a franchise and thus must comply with the code:

1. There is a written, oral or implied agreement.
2. The business supplies goods and or services under a system or marketing plan.
3. The business is substantially associated with a trademark, advertising or commercial symbol.
4. The franchisee pays a fee, directly or indirectly.

Upon this self-examination many businesses realize they are already a franchise but do not comply with the code and as such could be in breach of the TPA, transgressions for which can incur horrendous fines. If in doubt, you should immediately seek advice from a franchise specialist solicitor. They are easy to locate, as those that practise in the sector advertise on the Franchise Council of Australia?s Franchise Directory. This is also a useful reference point to see if there are already franchises in your field and possibly what they cost (see www.franchise.org.au).

Businesses normally franchise for one, or sometimes all of three, main reasons:

1. They have a special product or unique selling proposition or market edge over competitors which necessitates the need for rapid growth to gain first mover advantage in a market. Franchising facilitates this growth and increases brand exposure.
2. They are totally sick of staff who let them down and do not perform to the maximum. Franchises consistently outperform company-owned units through the sheer tenacity and enthusiasm that a franchisee brings to the table.
3. They lack capital for expansion which the franchisee provides. This capital investment also makes the franchisee incentivized to go the extra mile because they have ?hurt money? invested in the business.

Franchising also provides consumers with consistency of delivery and franchisors with the control measures necessary to install this into the system. I always relate to this by saying every time I buy a McDonalds hamburger I know I have to remove that green pickle before I can enjoy my meal. But I know what I am going to get before I make my purchase decision. Spotless premises, high food-hygiene standards, quick service, value for money and an acceptable quality meal. This does not happen by accident in McDonalds or any other quality franchise. The franchisees and staff are highly trained people who are supported by detailed systems and operations manuals that cover every possible scenario. So there lies a lesson for any business ? document everything. Nothing must be left to chance and, in food businesses, this is incredibly important. I see too many businesses that will simply fail if the owner is incapacitated, disabled or absent from the business for any length of time. It is all in the owner?s head and he assumes everyone knows how to do everything. Start writing everything down ? eventually you will have an online operations manual, which will add considerable value to your business.

This consistency of delivery means that compliance with the system must be strict to achieve it and, as such, everything can and must be minutely controlled. If a franchisee consistently strays outside of the set boundaries they can be terminated in order to protect the brand and the business of the franchisor, and indeed all the other franchisees.

Done professionally, franchising is an extremely safe expansion method. There are some very good consultants in Australia, but like every other profession, sadly there are some very poor ones too. Make sure you establish how long the advisers have been in business, who they have worked for and what qualifications they hold. The better ones are at least franchise diploma qualified and possibly hold Franchise Council of Australia qualifications such as fellowships. Do not attempt to try and franchise your business without the correct advice, as that is sheer folly. Specialist lawyers, consultants, demographers and accountants who practise in the field will set the fundamental
structures and processes that will take your business to new heights, and they could save you literally hundreds of thousands of dollars over time.

It is imperative that, as a potential franchisor, the executives understand the relationship management aspect of a franchise. The culture of the business is crucial to its success. Franchising is about working together for mutual gain; it is about family; sharing and caring; being firm certainly, but fair also. So if your culture is one of a dictatorship ? do not franchise. However, if you are prepared to encourage, cajole, assist and guide your business ?partners? ? your franchisees ? then success is more likely.

As in all business situations, it is just as important to know when to get out of business as it is to know how and when to get in. Franchisor businesses are attracting very high multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) when they are sold. Why? Because they hold contracts with franchisees that guarantee incomes far into the future, making them prime takeover targets. Not a reason to franchise initially, but a wonderful reward at the end of the journey for those that do it well.

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Phil Blain ? Fellow FCA, AFE, MIMC, Dip Bus (Franchising)?Principal, Business Development Company, Franchise Division.

Phil has been a Franchisee, Franchisor and a highly respected franchise consultant for the past two decades. He now heads up the National Franchise Division of Business Development Company Pty Ltd., commonly known as BDC Franchising.

Phil has been a National Director and State Chapter President of the Franchise Council of Australia (FCA) He holds a Business Diploma in Franchising and the Accredited Franchise Executive qualification (A.F.E.) and is a member of the Institute of Management Consultants.

Phil has a broad knowledge of franchising in Australia and experience with most of the key systems and people in franchising.?Phil can be contacted direct on 0419 044 862.

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