Thinking About Buying a Franchise?
Congratulations on making your first incredibly smart business decision!
If you are considering self-employment through a Franchise, you are exploring the most successful business growth model in history. New business failure rates within the first five years are estimated at around 80%. However, statistics show that the failure rate of franchises within the same period is estimated to be well below that. Here’s why...
The Benefits Of Franchise Ownership
Proven Model
You are buying a business that is modelled on a proven & successful operating system. In most cases, the Franchisor has operated the business successfully for a number of years prior to franchising. You benefit from the blood, sweat and tears that have been invested into the model.
Reduced Risk
The advantage of buying a franchised business is that the business model is already a proven success if systems are followed. Along with the ongoing support provided by the Franchisor and Head Office, most Franchise Partners are able to avoid the pitfalls that start-ups often don’t survive.
Ongoing Support & Guidance
In a Franchise system, you have ongoing access to support and resources from a Franchisor committed to your success. Franchisors are only successful if their Franchise Partners are successful. They are 100% in your corner.
Brand Strength
Brand recognition is a powerful tool for attracting new customers. Building a recognised brand takes many years and usually requires significant investment in marketing. Joining a Franchise is almost like queue jumping in business terms. Joining an emerging Franchise brand can also have advantages, such as lower Franchise fees and the first choice of your ideal territory.
Purchasing Power
When it comes to negotiating better supply rates and terms, there is strength in numbers which is one of the reasons franchisors will often stipulate mandatory supply agreements for the Franchise network. Often these special rates are better than independent businesses can access.
Marketing Assistance
The Franchisor will either look after marketing for the group or has trialled many different advertising mediums. It can give guidance based on experience from a wide variety of different advertising options. Most start-ups waste significant dollars testing marketing creative and channels.
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Franchisee Fees Explained
Franchise Fee
This is the initial fee paid for the grant of rights to use the Franchisor's system, brand, and Intellectual Property. Taking into consideration that the Franchisor has taken on the risk and invested significant time and funds to market the brand and develop a sustainable and profitable operating model is important. They have developed relationships with suppliers and sourced the right equipment, materials, and resources to which you will now have access as a Franchise Partner.
To truly appreciate the value of that investment is to look at the failure rate of independent start-up companies in their first three years, which is estimated at around 80%.
Fitout Cost
If the franchise operates from leased premises, the fit-out costs will cover things such as:
- Equipment
- Furniture
- Decorating
- Flooring
- Signage
Inventory/Start-up Items (service-based)
Inventory or start-up costs will be determined by the nature of the work to be performed. The amount to be invested in start-up inventory will vary from one franchise to the next and cover essential items such as:
To truly appreciate the value of that investment is to look at the failure rate of independent start-up companies in their first three years, which is estimated at around 80%.
- Vehicle + signwriting
- Tools
- Equipment
- Materials
- Merchandise/stock
Training Fee
Some Franchisors separately identify the cost of training a Franchise Partner, and others will build it into the Franchise Fee. The training fee covers the Franchisors costs to prepare you for a level of competency to operate the business. Training may include the cost of training personnel, a venue, and any third-party certification or licenses, e.g., a First Aid Certificate.
Royalty
The royalty fee is paid for the ongoing rights to the Franchisor’s intellectual property, trademarks, and use of the unique systems and processes. The royalty fee is most commonly paid as a percentage of the gross revenue of the franchise or as a fixed monthly fee.
Marketing Fee
The marketing fee is generally paid into a central marketing fund that pools Franchise Partner contributions to pay for marketing that promotes the network's brand and goods and services as a whole. The marketing fee is often calculated the same way as the royalty –as a percentage of turnover or as a fixed ongoing amount.
Admin/Support Fee
Franchise Partners contribute to the Head Office's running costs of supporting the Franchise network, often referred to as an Administration or Support Fee. Some Franchisors will build this into the Royalty, and others like to identify this cost separately.