Franchising fortunes

• Fran Molloy
• 2 April 2009
• Page 1 of 2 : single page

We love our franchises in this country; per capita, Australia is the most franchised nation in the world, with three times as many franchises per head as the United States.

More than half a million Australians work in franchise businesses, which make up about 14% of national GDP. According to a recent report from market forecasters IBIS World, the franchise sector is one of the fastest growing in the nation, predicted to make up about a quarter of GDP by 2020.

But with just 5% of all Australian businesses franchised so far, there’s plenty of room for further growth.

Despite the current economic downturn, the franchising boom is set to continue; in fact, the downturn is a boon for franchising, as older executives abandon the corporate sector for the relative safety of a franchise rather than starting a business from scratch.

In the past, an economic downturn has meant a rise in golden handshakes or redundancy payouts; and, according to business commentator Peter Switzer, we’re about to see a lot of potential franchisees ready to buy.

“A similar thing happened in the early 1990s, following the recession at that time,” says Switzer. “People in their 50s who have been made redundant realise that there’s limited prospect of them getting a job, so they will consider setting up as a franchisee, in effect buying themselves a job.”

Less risky business

Buying into a franchise is no guarantee of commercial success; more than 10% of franchisee operations will fail in the first three years, according to IBIS World. However, the risk is far lower than for non-franchised businesses, which have 2.5 times the rate of failure.

Franchisees have access to proven systems, procedures and regulatory protection through the national Franchising Code of Conduct administered by the Australian Competition and Consumer Council.

“You’re going in with the backing of a major brand, which is a big driver for success,” explains industry analyst Ed Butler of IBIS World.

Establishing a franchise is also a less risky option for small business owners looking to grow. For a business with a successful formula, the move into franchising can be an opportunity to expand their brand rapidly across a wide geographic area without the employee and capital investment they would otherwise require.

However, choosing to take your business down the franchise route can be demanding, timeconsuming and complex. There is a stringent and onerous regulatory system, through a centrally administered Code of Conduct, which includes strong penalties for breaches and a competitive market for new franchisees.

What’s it cost to buy a franchise?

With the service sector becoming a franchise hotspot, Switzer says Franchise Expos are increasingly offering low-priced franchises that could be acquired with the help of a redundancy payout.

Home-based businesses now account for around a quarter of all franchise systems – and start-up costs for a franchise in the non-retail sector averaged around $62,000 in 2007, according to IBIS World.

However, the Franchise Council of Australia (FCA) estimates the start-up cost for mobile service franchises at anything from $5000 to $50,000.

The start-up costs for retail franchises were significantly higher; IBIS World reports the costs averaged around $200,000 in 2007, while the FCA says costs range from $50,000 to $250,000 or more. There are a huge variety of franchises available; less than 40% of franchisee businesses are with major industry players. The service sector occupies a large and growing portion of the market.

Steve Wright, executive director of the Franchise Council of Australia, says choosing a franchise that’s the right match for you is an important part of the process.

For some who leave large companies to buy a franchise, finding a franchise that serves a market familiar to you – ‘buy what you know’ – can help ease the transition.

“Consider the skill sets you have developed from your corporate life and find a franchise system that requires similar competencies,” he suggests.

But there are no set rules; many franchisees move into a brand new market but still find their corporate history serves them well.

“Disciplined and business-minded skill sets are a good fit and always remember, nothing beats hard work and passion,” says Wright.

The fit between franchise and purchaser is a very personal one, he adds.

“I have seen examples of both corporate accountants and former army personnel now running fast food outlets. Again, skill sets can be quite transferable and, when it comes down to it, hard work, passion and good business sense are always the key ingredients to help make a franchise system successful.”

But going into franchising with the belief that you are buying yourself a job can be a sure-fire path to disappointment.

“You just can’t go into a self-employment situation, including franchising, without being aware that you could risk losing your investment; there’s just no guarantees of success,” says Tim Dixon, who is the CEO with Franchise Works, a consultancy service for businesses setting up franchises.

 What’s involved in franchising your business?

Dixon says most business owners who try to franchise their existing model have no idea how difficult it is going to be. “It’s definitely no get-rich-quick scheme,” he says. “Some businesses think it’s going to be a lot easier than hiring staff, but it’s actually a lot more challenging. You will be under enormous pressure from your franchisees, they are not going to just do what you tell them without question.”

Many franchisees will literally put their house on the business, he adds. “So you have these people who have risked a lot, who will challenge you and want to validate and understand everything you put forward.”

Franchising is a double-edged sword, he warns. “On one hand, you’ve got really passionate people who are really motivated to succeed; but you’re also setting yourself up for a lot of pressure, which will really determine whether you have what it takes to be a really good leader.”

He says there are plenty of people who go into the sector with very unrealistic expectations.

“The reality is, franchising provides a framework that allows a franchisee to spend more time on the key drivers of a business; that is, acquiring clients, generating sales and improving profitability.”