When a person decides to go into business for themselves via franchising, their thoughts inevitably turn to which system, and whether it should be an existing outlet or new operation.

This article addresses the issue of choosing between a new, start-up outlet (also known as a “greenfield” outlet), or buying an existing franchised business and looks at a number of interdependent factors that contribute to the choices made by franchisees.

 A recurring theme of the state and national franchise inquiries which have resulted in changes to the Franchising Code of Conduct starting from July 1 is the need for greater education before people buy a franchise.

The Franchise Advisory Centre and many others which made submissions to these inquiries all advocated the need for pre-purchase education for potential franchisees as one way of reducing future potential conflict in franchise relationships.

The premise is simple: If people know more about franchising before they commit to a franchise agreement, they are able to undertake more effective due diligence and have fewer (and possibly unpleasant) surprises later on if they become franchisees.

The ACCC has provided guidance in relation to a number of questions raised by the Franchise Advisory Centre about the changes to the Franchising Code of Conduct.

Franchisors are noting an increase in the number of franchise applicants who are proposing to pay for their franchise using funds borrowed in part or full from their parents or other family members.

This is partly the result of several economic and social trends, outlined as follows:

A review of the approximately 1,100 franchise systems known to be operating in Australia indicates that somewhere between four and eight per cent are operated or ultimately owned by publicly listed companies. This small but growing list represents an emerging trend in Australian franchising which may also included publicly listed franchisees in future.

Research by the Franchise Advisory Centre indicates there are several key motivating factors for the decision to buy a franchise. While most of these factors will be present for different people’s decisions, the relative importance given to each of these will vary from one person to another, resulting in unique combinations which might arrive at the same destination, but take different paths to get there.

These key decision making factors are:

- Lifestyle
- Brand Security
- Self Direction
- Income
- Skills Development

One of the reasons for the failure of start-up franchisors cited in a study by UK academic John Stanworth was that new franchisors often underestimated the amount and cost of support required by franchisees.

Similarly, one of the greatest sources of franchisee complaints reported to the Australian Competition and Consumer Commission (ACCC) about their franchisor arises from a perceived lack of support.

The issue of support – and the form or forms it should take – exists as a challenge to both franchisors and franchisees. Franchisees can find that the support offered does not add value to their businesses or meet their expectations, while franchisors can find that the cost of support can quickly erode the profitability or other benefits of the franchise model.

The result is that both parties recognise the same issue from different perspectives, and often collide accordingly.

 The franchisee described it as a “dirty, filthy letter” and was seething about both the breach notice’s content and that such an abomination should be laid before him.

The franchisee was truly angry, and left the franchisor in no doubt about the displeasure the breach notice had caused.

But could this conflict and anger have been avoided by a better understanding by franchisees of breach procedures?

With many Australian franchise systems commenting on a lack of suitable franchise applicants domestically, and the economy still growing despite the impact of the Global Financial Crisis overseas, business migrants are attracted to Australia and buying franchises to meet their visa requirements. 

Migrants from around the world are increasingly attracted to franchising as a way of qualifying for an Australian business visa and are prepared to turn their lives upside down to settle Down Under.

Key changes to the Code and the Trade Practices Act announced today include:

1. The introduction of fines and penalties for unconscionable conduct and false and misleading representations;
2. Random audits of franchise systems to be conducted by the Australian Competition and Consumer Commission (ACCC);
3. Public warnings about rogue franchisors;
4. An acknowledgement of good faith in relation to franchise agreements;
5. A requirement to clarify end of term arrangements, including mandatory period of notice of renewal;
6. Provision to include all affected franchisees of a group to be included in ACCC actions;
7. The creation of an expert panel to advise on inappropriate franchising behaviours to be covered by the Code.

The changes to the Franchising Code of Conduct announced on November 5 by Federal Small Business Minister should send shivers down the spines of some participants in the franchise sector.

But it probably hasn’t, because those who stand to be most affected by the changes to the Code deny that that they are franchisors. That’s right. The people who are likely to be most impacted by the new regulation of franchising don’t believe that they are involved in franchising.

If you’re thinking about franchising your business, be prepared to make yourself redundant. In fact, try to make yourself redundant anyway.

That doesn’t mean that you sell a few franchises and retire. Far from it, when you franchise a business you escalate your commitment to the business, not decrease it. The difference is that the nature of the commitment will change so that instead of spending every day working in it, as a franchisor your job is to work on it – full time.

This means that someone else has to work in it, and that someone else needs to be as good as (and preferably better) than you at the things you did when you were working in it.

So how do you make yourself redundant from the daily operations? Consider the following:

Many small business owners exist in the misapprehension that franchising is easy.