Franchising sounds like a ready-made solution for success but you should be aware of the upfront costs before you take the plunge.

What is a franchise?

According to the Australian Consumer and Competition Commission (ACCC), which governs the industry’s code of conduct, it is a business system that involves one party (the franchisor) granting another (the franchisee) the right to operate a replicated franchise business under the same trade name and use established management, marketing and operating procedures.

In return the franchisee commits to paying the franchisor a capital investment and ongoing fees and complying with franchise procedures.

Are you ready for challenge?

Are your skills, personal experience, education and temperament suitable for this type of business? It may be wise to seek advice from a mentor or existing franchisees in testing your suitability.

The ACCC recommends prospective franchisees put themselves through a thorough self-assessment before committing. Asking yourself upfront, why you want to buy a franchise, may help you minimise the risk of joining a system that is not right for you and avoid disputes with your franchisor.

Other questions to consider before embarking on a franchise include:

Whether it will be a primary or secondary source of income for you and whether you can afford the investment risk
Whether you have adequate borrowing capacity to fully set up the franchise
The ongoing commitment of owning a small business, including the hours you are able to work
Family and lifestyle commitments that may be affected by owning a franchise.

Do your research

Researching the franchise and doing the appropriate background checks will help you make an informed decision. It may be wise to work with an existing franchisee so that you are able to see how the business operates first hand, including turnover and staffing requirements.

Your research should also involve the verification of any information provided to you by the franchisor in the disclosure document and in any other documents. It is also important to run the numbers and check the disclosure document regarding earnings, profitability and site selection.

One of the important items franchisees need to provide for is working capital, which is the cash you require to finance your operations.

Understand your agreement

It is imperative that you read your franchise agreement carefully and make sure you understand all the terms and the legal consequences of what you are agreeing to.

Although every franchise agreement is different, their general purpose is usually the same. All franchise agreements will state the rights and responsibilities of the franchisor and franchisee. They will deal with items such as site selection, lease arrangements, fees, territory termination, renewal and the length of the franchise agreement.

It is wise to seek legal advice as this will help you decipher what you are signing and how the terms will affect you legally.

Advantages

One of the key advantages is that own your own small business with the benefit of a larger business network and system, which may provide added security. This comes with the added support of access to business knowledge and planning, management skills, marketing skills and product knowledge.

Another advantage is the ongoing support you will receive from the franchisor in areas such as advertising, operating procedures and assistance, training and management, and growth of the product or service and the franchise.

Disadvantages

One of the major disadvantages in the eyes of some franchisees is the restrictions imposed on the way you operate the business.