4. How long does a franchise last?
Franchise terms may be as short as one year, or at the other end of the scale, may be granted in perpetuity. Generally the industry average is a five-year term with an option to renew for a further five years.
Of course franchisees who wish to exit their businesses need not wait until their franchise term is completed, but can sell the business at any point with the franchisor’s consent.
5. How much does a franchise cost?
Prices for franchises vary greatly from one franchise system to another and even within franchise systems. The cost of mobile or service franchises, which mostly do not require fixed shop-front locations and can be operated on a mobile basis, typically ranges from $15,000 to $75,000. Retail franchises, where most require a fixed shop-front, shop fittings, stock, etc, may cost anywhere from $50,000 to $250,000 or more. The initial franchise fee is typically in the range of $30,000 to $60,000. The cost of fixtures, fittings and stock will vary depending on the franchise system.
Existing franchise businesses for sale may not be the same price as new franchises for sale. Factors such as goodwill, depreciation of equipment and fittings, stock levels and lease terms may also come into play.
6. Should I talk to other franchisees?
Absolutely. This is probably the most important part of due diligence. A list of current and past franchisees must be included as part of the disclosure information that franchisors provide to potential franchisees.
Contact several franchisees, especially those who are in locations near the one you are considering. Introduce yourself; be brief and respectful of their time. Use your own judgment about the information that is provided and keep in mind that should you proceed, these franchisees may be your future colleagues.
7. What are the fees and royalties?
Service-based franchise systems typically have different fee structures to retail franchises. Retail franchises typically charge a royalty of 4-10 per cent of turnover, whereas service franchises sometimes charge a fixed fee. Other franchise systems charge a margin on product supplied, and/or receive funds via rebates from suppliers.
These ongoing fees or royalties are paid to the franchisor for providing ongoing business, management and technical support, etc. In addition to the management fees, franchisees may also be required to pay into a central advertising or marketing fund and this may also be done on the basis of percentage or flat contributions on a weekly, monthly or quarterly basis.
8. What happens if I have a dispute with my franchisor?
If you have a dispute with your franchisor you need to identify the underlying issues of the dispute and attempt to resolve these through mediation. Disputes may occur from a misunderstanding of an aspect of the franchise relationship, which is outlined up front in the franchise agreement. Litigation is considered a last resort from extreme dispute cases where mediation has not been successful.
Getting advice
Anyone considering becoming a franchisee should seek competent professional advice from qualified and experienced advisors. The Franchise Council of Australia (FCA) directs potential franchisees to consultants, accountants and lawyers who specialise in franchising before they make any final commitment. Potential franchisees are well advised to use the cooling-off period to check facts and figures to determine if proceeding is still the correct option for them.
The Franchisee Guide and What you need to know before buying a franchise are just two of the publications that can decipher your questions on franchising. All publications can be purchased at www.franchise.org.au.
