Franchising can be a great way to start a business with a ready-made model and resources for a fee. Research shows that four out of 10 franchisees used to work for the franchisor, making it a natural transition.
Franchising is a mature sector in Australia, so franchisors are becoming creative in finding ways to expand. Even part-time franchising is an option. Franchising is common in the fast-food sector, with 90% of businesses operating on a franchise model.
However, it’s important to weigh the benefits and drawbacks before making the move, as this article explains.
The advantages of running a franchise
Buying into a franchisee business usually means you’ll be able to:
- Tap into a business model that’s proven with work processes, a ready reputation and brand
- Access economies of scale when buying supplies
- Link to a pool of resources to fund advertising and promotion
- Be trained in how to run the business – often part of the deal with your franchisor
- Secure finance more easily, as it may be less than if you set up a business from scratch.
However, while these are attractive to the would-be franchisee, it’s important to understand the downsides.
The risks of taking on a franchise
Over the years, franchisees have faced risks such as:
- Not doing their due diligence before signing a contract
- Feeling obliged to sign unfair contract terms leading to exploitation
- High set-up fees depending on the business location
- Having to compete with other franchisees in the same region for customers and clients
- Opting for franchisor-assisted lending rather than securing funding elsewhere
- Having ongoing fees for franchise renewal, promotion, transfer, employee and management training, etc.
- Being limited in how the business will run, including the use of logos, store design, staff uniforms, even quality of food sold, which may constitute restraint of trade
- No guarantee the franchisor won’t become insolvent, renew the agreement at the term’s end, or allow you the option to resell the business.
Traditionally, the franchising sector also has a low female participation rate.
Some of the above risks were detailed in a Federal Parliamentary inquiry into the fairness of franchising released. Since then, the Australian Competition & Consumer Commission (ACCC) has updated its code of conduct for franchisees and franchisors.
Importantly, the code states that franchisors should not give franchisees misleading or deceptive information. That’s why it’s a good idea to check what franchisors have disclosed about their operations on the Franchise Disclosure Register.
The ACCC also runs a free course to help would-be franchisees decide if franchising is a good fit. Check out this guide to Australian franchise laws and regulations. One law under question is whether franchisors are liable for their franchisees’ contraventions, such as underpaying workers. The Fair Work Ombudsman’s test case is ongoing.
You can protect your investment as a franchise with solid risk management, including a tailored package of relevant policies. These are some of the specific risks you’d want to include in these policies:
- Business interruption
- Public/products liability
- Breakage of internal and external glass
- Deterioration of stock
- Burglary and theft
- Machinery or equipment breakdown
- Money cover whether at home, on your business premises, or to and from the bank
- Fire and perils, which cover you for stock, fixtures and fittings, plant and machinery.
As well, depending on your agreement and operations, ensure you look to cover:
- Staff (workers’ compensation)
- Professional indemnity
- Management liability
- Transit risk
- Intellectual property and legal expense
- Product recall and contamination
- Cyber security risk.
Whether you own or are looking to purchase a franchise, speak with us to understand your insurance obligations and risks.