insights into franchising or licensing your business 270315 bklt

Insights into franchising or licensing your business.

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Insights into franchising or licensing your business?

Insights into franchising your business?

of 14 © Franchise Australia Pty Ltd December 2014

Introducing; John Brown, MD. Franchise Australia Pty Ltd

Experience. Knowledge. Support Essential for Franchise Success

With over 34 years of experience in all facets of the franchise/license sector, John Brown offers an unparalleled level of knowledge and expertise in consulting to this acutely specialised business segment. Following six years in banking John began his 12 year commercial career in Project Administration/Accounting where he worked for several large multi-national industrial and mining/construction companies across Australia. John entered the franchise sector in 1981 and became a franchisee in the Bedshed Group in Western Australia. Over time, he owned and successfully operated five stores. His strategy at the time was to acquire underperforming stores and improve profitability for a Capital profit on resale. After a brief period as a Business Broker, John then became one of three partners at Franchise Alliance, a small but specialised Perth based advisory company that provided recruitment services to franchisors, supplemented with a small range of development programmes. Alongside Franchise Alliance the partnership also founded Expense Reduction Analysts in Australia, with John as the founding Managing Director. The partnership also held other service based business format franchise systems. In 1997 John acquired Franchise Alliance wholly and then converted it into a pure consultancy in the franchise sector and later expanded it across Australia with partners in each state. John retired from Franchise Alliance in 2008. With a proven track record as a franchise business owner, able to identify and implement performance enhancement strategies, and as a past partner and Chairman of Franchise Alliance in Perth and past founder of Business Development Alliance (BDA) also in Perth, John’s unique understanding of franchising and licensing has allowed him to guide many through the often complex and sometimes confusing disciplines of setting up and profitably operating a network.

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© Franchise Australia Pty Ltd December 2014 of 14

Today, through his new brand Franchise Australia, John provides advice on all aspects including:

Start-ups

Development Strategies

Structure

Feasibility Studies

Systemisation and Documentation

Coaching for franchisors and franchisees alike

In-house management support

And many other individual customised services

Specialising in strategic advice for small to medium sized enterprises involved in all manner of business segments in Western Australia and South Australia, he enjoys building mutually valued relationships with his clients; an essential ingredient for optimum outcomes. John has a key and strategic relationship with Franchise Right a professional development and training consultancy in Melbourne, owned and managed by Sue Campbell and Phil Blain. They too have very extensive experience in the sector spanning some thirty plus years. See www.franchiseright.com.au John also has a long standing and strategic relationship with Franchize Consultants NZ, the leading consultancy in New Zealand, and Dr Callum Floyd is the Managing Director. Dr Floyd has a Doctorate in international franchising and his global reputation for knowledge and expertise is unparalleled. See http://www.franchize.co.nz/ This successful, mutually valued collaborative relationship between Franchise Australia, Franchise Right and Franchize Consultants NZ has allowed the Directors to work in harmony over many years in the development of network operating models, training programmes and related system elements. The clients of each firm thereby derive immense benefit from this professional collaboration. So, if you are a little short on network experience or you simply need an expert as a sounding board, then take the time to contact John for WA or SA, or Sue for the ‘east coast’ and Callum for New Zealand, to find out how they can help to guide you on your journey.

http://www.franchiseright.com.au/

http://www.franchize.co.nz/



Thank you for your interest in franchising and licensing. Whilst the language in this documents speaks to franchising in particular, other than in respect to the statistics below, and the topics surrounding the Franchising Code of Conduct the balance also applies to licensing albeit with some elements of change. The information on the following pages has been prepared for you, to answer many of the questions we are most often asked about franchising. We sincerely hope that it helps you in your considerations. Taking the decision to franchise your business is likely to challenge or change many things in your current business and the way that you operate it. Clients in the past have found only benefit from the process, and their business performance has always improved and sometimes quite dramatically. Franchising in particular has proven to be the chosen business model for more than eleven hundred businesses in Australia and this sector is a very significant contributor to the nation’s economy.

Revenue $144 billion (2014)

Number of Franchisors (estimated) 1,160

Number of franchised outlets (estimated) 79,000

Total people employed > 460,000 of all employment in Australia

Proportion of Australian home-grown systems 86%

Proportion of Australian Franchisors operating internationally

>30%

(Source: Griffith University ‘Franchising Australia Survey’ results, 2014) If done well it can be the best growth strategy and legal structure for many types of businesses, however if not fully understood and done poorly, it can quickly become troublesome. We would liken it to building a 20 storey apartment building. If the foundations are laid properly and the overall plan is executed with professionalism and care, then the apartments will be attractive to buyers and the building will stand tall for many years to come, providing fruitful investment returns for everyone. We hope that what follows is of value to you in your consideration of franchising as a growth structure for your business!

Why Franchise?

Most businesses that choose to do so because they face commercial limitations in at least one of these three areas: -

Finance - They do not have access to the necessary growth capital, or have other corporate priorities for investment which conflict with expansion goals. It is difficult to grow any business without the necessary capital to do it effectively. This situation can often limit opportunities and potentially cause a competitive advantage to be squandered.

Personnel - Many have problems in recruiting, retaining, or motivating good managers, agents or staff. Perhaps they also experience difficulty in managing large numbers of personnel at a distance from company headquarters.

Opportunity - They seek to expand more rapidly than traditional methods would normally allow. It is impossible to be in two places at the same time and one can only deal with a limited number of issues without compromise. Ultimately the business could be compromised and performance may suffer.

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Franchising your business can assist in overcoming all three issues in the following manner:-

With Finance Resources, the franchisor recruits franchisees, who participate by providing both start up and working capital for the business. The new franchisee conventionally signs the lease or a Sub Lease, buys the plant and equipment, pays for the stock and provides the working capital to operate their business. In short, the franchisee accepts full financial responsibility for establishing and running the new business unit, and is prepared to pay an amount by way of an initial Fee and an ongoing Service Fee for the opportunity. There may specific areas of variation here if it is to be a ‘license’.

With Personnel, quality and commitment count. When a franchisee makes an investment using his or her own money in a franchised business, commitment then follows. Moreover, almost all successful franchisees directly manage their businesses themselves. No wonder most franchisors typically see their franchisees as more motivated team members than employed staff.

In providing Opportunity for growth, franchising gives you an edge. Franchised growth relies far less upon access to capital and human resources than do other methods of expansion. Franchising can facilitate both market penetration, and efficient market saturation.

In addition to the access to external capital, the right people and the capacity for growth in less time, franchising can provide you with other significant advantages:

Less daily operational responsibility - The franchisor is free of day-to-day unit operation and can concentrate on the larger issues and growing the network. This single-minded focus on growth and support will help you to achieve what you previously thought unattainable.

Cost savings - The cost of putting together a franchise system, with the potential for significant expansion, is often less than the amount required to open one further company outlet. It real terms it is an investment in a new company Asset which, when fully leveraged can bring strong returns.

Purchasing Power - Purchasing of supplies, advertising and other services become more cost effective

as a franchise group expands, and those benefits flow through to company owned outlets as well.

An exit strategy - By creating a franchise group, with contractual cash flow from franchisees in place and for a set term (e.g., 10 - 20 years or more), you will have a valuable new asset that is a highly saleable commodity. The market place for mature franchise systems is buoyant and Goodwill values remain firm for well-respected Brands operating professionally.



Should I Licence or Franchise my Business?

A Licence is not necessarily a Franchise; however a Franchise is a specific type of Licence in a legal context. The difference was not all that important until the original Franchising Code of Conduct was established in 1998 wherein a specific ‘definition’ was created to legally define a ‘franchise’ as opposed to other ‘license’ models. Today, if you 'match' the definition of a franchise contained within the 'Code', it deems your structure as a franchise even if you don't want it to be one. The difference can be significant. In certain circumstances it may be desirable to work outside the Franchise structure, yet retain some of the benefits of franchising. These benefits are normally associated with control over the conduct of others using your information, systems, products and/or Brand name. The Franchising Code of Conduct specifically defines a business relationship structure as a franchise if it contains all of the following:

A written, oral or implied agreement between the parties,

A payment, either up-front or ongoing, for the provision of goods or services, (except at normal wholesale pricing),

Provision of a marketing plan or business system substantially determined, controlled or suggested by the franchisor,

Substantive use of Trade Marks, Brands or Names owned by the franchisor as a primary business identifier.

A more complete explanation of these criteria can be seen in the Franchising Code of Conduct. Armed with this definition it is easy to see that the key components of a franchise system are:

(a) The existence of an agreement, (b) Payment of money for goods or services, (c) Prominent use of the Brand name, and (d) Group marketing or business system, at least part controlled by the franchisor.

If you meet all of these four criteria then the full effect of the 'Code' will apply to your activities in business.

"Like it or not you are now a franchise and you should think and act accordingly!" As stated above though, in some instances it is possible to create a structure that can sit outside the 'Code' thereby avoiding the issue of compliance. If you have a desire or need to sit outside the 'Code', then your business may suit this type of derivative structure and considerable discussion will need to be held to explore the opportunities. Providing that all of your business objectives are served, these types of structures can be manageable. It must be stated, however, that, in the vast majority of cases, some long-term objectives and the future value and/or security of a business may be compromised when the pure Business Format Franchise model is altered simply to sit outside the 'Code'. There should be sound commercial reasoning to take this direction, which is then considered alongside the advantages and disadvantages of any proposed structure.

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Who Should Contemplate Franchising or Licensing their Business?

It is not for everyone, nor is it for every business; considerable thought must be given to the notion before embarking on the journey. Prior to proceeding you will require expert advice to ensure that you make a balanced and informed decision whether to proceed or not.

What type of person do I need to be?

You will certainly need to be a great leader. To inspire a group of individuals and lead them on a prescribed journey you will need to be committed to helping others to achieve their goals. Each and every franchisee in your group will be different to the rest and, have differing personal and business expectations and goals. Your role is to bring them into alignment with your network goals and to manage their expectations, and to assist them to reach their goals. When they reach their goals, then it is more likely than not that you too will reach yours. If this is not you, then you probably have two choices: either don’t franchise your business, or employ someone who holds these critically important skill sets and task them with the management responsibility. This would change some internal dynamics of course, however with the right people in place from the start you can still grow the network and achieve your goals, albeit without the key management role yourself. Franchisees do look to the owner for leadership though, so considerable thought should be given to this.

All businesses need growth and particularly in today’s economy

Growth is a pre-requisite to survival and creating a network is a means of attaining growth without the traditional limiting factors. The rate of growth in your franchise network will be determined by many factors, not the least will be the rate at which you can attract the right type of people. The environment is competitive and the Franchising Code of Conduct has sparked public awareness of the issues for franchisees to consider when selecting a suitable franchisor. Franchisors today are faced with well-educated enquiry and must be prepared to comply with the Code in all respects. We at Franchise Australia are fully supportive of the new 2014 Code because it provides for Best Practice standards in the sector, which in turn is good for all. For your franchise to be attractive and stand above the increasing throng of competition, it must be professional in every respect, including the presentation of the opportunity and all forms of documentation, systems and processes. It is therefore important that, should you choose to franchise, you are prepared to develop the structure and system correctly. This will mean investing in the process, protocols and documents necessary to package the opportunity with professionalism and integrity. Every year the scope for new industries to use franchising or licensing as a growth platform continues to expand. It all started with fast food and real estate, is now a growth system used by a wide range of manufacturing, wholesale, service and retail businesses. Even professional services in the areas of health, accounting, education, consultancy and financial planning have expanded in recent years through franchising and with marked success. Given all of the above, the key element for all businesses however is the people element. If the people internal to your business are not suitable to and supporting of a franchise programme, then it will likely fail to optimise. People are the deciding factor, not competitive or commercial impact in most cases. Get the people right, the model right and then if the commercial environment is suitable, franchising can be very successful.



Know the Answers!

To answer the questions for your particular business you must first be certain that the base criteria for can be reasonably met. To be confident about creating a network business model, you need to answer ‘yes’ to each of the following important questions: -

1. Am I suited to the role of being a franchisor or Licensor? 2. Am I prepared for journey to grow a network of like-minded individuals? 3. Is my business model free of any legal or governmental complications? 4. Is my business sufficiently profitable already, or is it able to be made more profitable with some

changes in readiness for franchising? 5. Do we have strong customer support and acceptance of our offer in the marketplace? 6. Is there a growth opportunity for my business in other regions? 7. Is there a sound future for my type of business insofar as I can see? 8. Can we manage the external threats to our business without undue risk? 9. Can others learn to operate it efficiently in other regions? 10. Is there likely to be a good supply of people that might like to operate a business such as mine?

To develop a successful network you must start with a successful business. It is unwise to even try to build a network based on a business that is either untested or struggling to survive. It must be proven beyond concept stage and capable of long term growth with a sustainable market demand. A good idea well researched is simply not enough to support a plan. Equally too ‘fads’ are not the basis of a sound growth model. The ability to train others is again critical to the concept of creating a network. Your business system must be packaged in such a way as to facilitate the entry of others, who must be capable of replicating the entire business model. If there are difficulties in this area, they will likely require too much support and time, and become uneconomical for you. In the early days of franchising, a company could begin to franchise by simply drawing up a legal document for the franchisee to sign and then place a few promising advertisements in the media. Those days are past, and rightly so. Respected and experienced legal firms today will want to know that you have had sound consulting advice as to your business model. Copying the model from another business (even if in the same category) can be a dangerous practice. With the introduction of the new Australian Franchising Code of Conduct in January 2015, (administered by the Australian Competition and Consumer Commission), a new standard of conduct has been set. Nothing short of complete Code compliance is acceptable and this will most certainly increase your prospects for success. Is Franchising Affordable? The question is more likely to be "Can we afford not to explore it?" or "Is it a value for money exercise?" The total cost range can vary considerably as some clients find that they can contribute to the project, thereby saving on professional fees. Under our guidance this can be considerable. Those costs will also vary, depending on the growth plan for the business. Is it to expand across Australia or simply remain in the home state? Does it have international potential? These questions need to be considered at the outset to avoid costly structural changes during the journey.

Franchise Australia


If franchising or licensing your business proves to be the most appropriate course of action, then it should be seen as a sound investment underpinning the future security of your existing business, as well as the development of future revenue streams, not simply as an expense. You should see a strong return if you do it properly. The initial investigative study we would undertake may not cost very much at all and it will provide you with the answer to the question, "Can my business be franchised or licensed successfully?" To proceed without knowing the answer to that question would be foolish, and we also advise against committing to a full development project without a feasibility study first being completed. Our professional fees are commercially fair, without being cheap or expensive. Our knowledge and expertise is invaluable. Unlike many other consultants and where possible, we will provide you with a 'fixed price' for all work scoped so that you can assess the project without the fear of any 'hidden extras'. Do You Need a Consultant? Yes, we believe it is critical that you receive expert advice to ensure that you avoid the mistakes that others have made in the past. At Franchise Australia we can help you to formulate the answers. Experience has shown that few companies, however successful in their own right, are fully equipped to assess their own potential and then put together the myriad of tiny pieces required for success, without outside assistance. People that do it themselves by copying the elements of another business model get it wrong in critical areas, and it costs them much more than professional expert advice ever would have. The risk of getting it wrong is immense and morally unfair to your future members. Even so, some companies still try a "do it yourself" approach by copying other material or models. This can be a dangerous approach unless someone in the organisation has very extensive and up to date knowledge of the processes of creating both the right structure and ‘business format’ system; plus of course all of the legal implications that reside within the Code should it be a franchise, and how they interact with operational management systems. Someone needs to know how it all comes together otherwise the final result will be a range of pieces that do not fit well together or work efficiently. This is risky and a waste of time, money and commercial opportunity. In real terms it usually costs less to develop your complete system than it would to open another outlet. A network plan does however provide you with the ability to open many more outlets with members paying for them, and paying you for the opportunity and ongoing support!



Experience Counts for Everything! If you do not have it yourself….use ours!

Our tried and tested method of developing a sensible and sound system for your business will follow a logical pathway to ensure that all relevant facts and circumstances are discovered, and then considered in the light of a change in structure and the development of your specific model. Since the introduction of the original Franchising Code of Conduct in 1998 and since replaced with the new Code in 2015, there is a legal footprint across all activities in franchising. It is not simply about the Franchise Agreement and Disclosure Document. It is about conduct, by both the franchisor and the franchisee across the entire business operation and relationship. This has brought an improved standard to the sector and provides comfort for franchisors and franchisees alike, in that there is little room for less than fair dealings and honesty in practices. The regulatory 'watchdog' over the sector is the Australian Competition and Consumer Commission (ACCC), which holds its authority under the Competition and Consumer Act 2010. Franchising today is a serious business and every step must be considered fully to avoid any contravention of the Code and related Regulations. In light of the Code and sound business practice, the following documents are the sensible minimum required to detail and control the formation of a franchise business: -

Franchise Agreement and Disclosure Document

Business Plan or outline

Marketing Information Brochure

Franchisee Recruitment System and Manual

Operations, Procedures Manual plus a Training Manual

Franchise Performance Review System

Site Selection Manual

Franchisor Management Systems and guidelines

Other business specific Technical Manuals and more…

Code and trade practice Compliance Manual.

Franchise Australia


Frequently Asked Questions

The following are examples of many other generic questions, together with the respective answers, which we regularly encounter in the process of discussing the non-specific prospects for franchising a business. These are intended to provide some comfort and a better understanding of some of the key issues when you become a franchisor.

Q 1. Am I responsible for the franchisees making a success of their business? Answer: Fundamentally you are not held responsible for their success, however you must follow a discipline which we build into your system to minimise that risk.

Q 2. Can they pull down the signs and then compete with me at any time? Answer: Firstly, they cannot legally withdraw from your franchise prior to Expiry of the term without your consent. You would have recourse against them if they did. Secondly, they may not be able to compete with you for some time after leaving your system without your consent. You may have some recourse if they did.

Q 3. How much money do I have to put into the advertising for the group? And what will the franchisees pay? Answer: Advertising and Marketing costs for the group must be conducted through a separate 'Fund' which you, as the franchisor, look after. In the design of your operating systems we will determine the contribution model for all operating units. It is unusual for the franchisor entity to contribute. We will recommend the rate of contribution by your franchisees into the Fund. By setting it up as a separate fund and bank account your exposure is minimal and the Franchising Code of Conduct also specifies some particular rules of operation.

Q 4. How much will my royalties be? Answer: When we conduct the Feasibility Study and then design your business system, we will recommend the level of all fees and charges for the new franchise structure. The term 'Royalties' is normally associated with 'money for nothing’; we therefore prefer to call your ongoing revenue stream 'Service Fees' to ensure that the fee is seen as a payment for services provided by you as franchisor.

Q 5. How many years will my franchise run for? Answer: The term of the franchise will probably be broken down into several smaller terms with options to renew. This can vary for some retail business types but generally follows the same structure, unless the property lease brings some challenges. Franchisees then 'take up' their extra optional terms as the business progresses.

Q 6. We supply all or most of our own products; can I be guaranteed that they will only use my products? Answer: The simple answer is yes; within the provisions of the law relating to supply. You will be seen as a supplier and we will need to build protection into the system to give you the product control you need. There are some challenges, but they can be dealt with. This supply line model may see a different approach to Service Fee structures as well?

Q 7. How do I control the prices that the Franchisees charge for goods or services? Answer: Again there are Legislative Regulations that we will have to work with but, fundamentally, you will be able to influence prices to a maximum price, but not a minimum. It is illegal for you to control the lowest price offer of other business people, even with your franchisees. We can provide a structure that will deal with your strategic needs in this area.



Q 8. Who is responsible for finding the new site for a new store? Answer: There are responsibilities for both you and the franchisee in this area. We would recommend that you, with our guidance, develop a 'Site Selection' criteria and this is then provided to new franchisees to use as a benchmark. Ultimately it is better for the franchisee to select the site, providing they know what to look for.

Q 9. I have heard about the 'Code of Conduct' and how it protects the franchisee from the franchisor; does it protect me from them doing things that are against my franchise system? Answer: The 'Code' is all about 'Fair Dealing' on all sides of business, but is biased in favour of the franchisee in terms of information exchange. As a franchisor, this simply means that you need to have a well-structured system of operation and, more particularly, a very strong Franchise Agreement to balance the risk more commercially. Together with the lawyers, we can deal with this. Your style of management will also need to be assessed by us and systems developed to help you to minimise your exposure and keep disputation to a minimum. There is a requirement for all parties to act in Good Faith in all dealings, and this reciprocal obligation is built into the new Code Conduct

Q 10. How many franchisees can I expect to have in my group? Answer: The first thing to appreciate is that this number is not plucked out of the sky. When we conduct the Feasibility Study we will recommend the broad number to you, if we are able to, based on your historic trading? Alternatively we may recommend that you commission a demographic study to determine more scientifically the nu7mber in each state that you propose to operate. No one would want to see the market saturated beyond the point where your franchisees can make a good return on their investment, so we need to understand the market opportunity for both today and in the long term. It is possible to build flexibility into these projections of course and we would recommend that, if appropriate to your business.

Q 11. Do franchisees pay me a fee when they renew their term? Answer: It does depend on the particular system that is created, however it is unusual today unless it is at the end of the full Term rather than the intermediary Term Renewals. At these renewal points they are usually responsible for paying to have a current version of the Franchise Agreement installed and the fees are normally limited to the lawyer's costs and some administrative recovery.

Q 12. How much control do I have over the way that they operate their franchise? Answer: In your Franchise Agreement we will provide you with the ability to prescribe the entire 'system of operation' in your franchise and the capacity to make any reasonable changes at any time. You will hold the controlling position to see that the system is followed to your satisfaction, with opportunities to regularly check up on their performance. The key here is how you execute that power over your franchisees without putting them offside. The business is fundamentally yours; however they have paid for the rights to use it for a while, within the provisions of the Franchise Agreement. Good franchisors are good people managers and do not use a dictatorial style.

Q 13. How do I keep my franchisees in check without being there all the time? Answer: At a point in time you will employ a Field Support Officer who will have this responsibility and in your management systems you should have a performance monitoring process that will enable you to closely watch the results of all franchisees in all key areas of activity, not just financial results. We will put that system together for your franchise to assist you to maintain optimum levels of performance by all franchisees, all of the time.

Franchise Australia


Q 14. How do I go about selling my franchises, I have never done that before? Answer: One of the things we can provide in our range of services is a 'Franchisee Recruitment Manual'. This is a comprehensive range of flow charts, forms, documents and checklists that together make up a system to follow in the sale of a franchise.

We can train you to perform this task should you choose to do it yourself. There is significantly less risk for you, if you do it yourself; once learned it is not difficult.

……………………………………………………………………..…………………………………………………………………… We trust that this insight has enabled you to better understand and appreciate the journey ahead should you decide to explore franchising as a growth model for your business. We are here to assist you in any way that we can, and sincerely look forward to providing you with our professional services. ……………………………………………………………………………… Footnote: The Franchising Code of Conduct 2014 contains many regulatory and mandatory elements which individually and collectively impact on a franchise business model and how franchisees and franchisors should act. This document should be read alongside the more comprehensively prescribed regulations within the Code of Conduct to fully understand its scope. See http://www.comlaw.gov.au/Details/F2014L01472 ……………………………………………………............

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John Brown PO Box 1080, Kalamunda, WA 6926

E: [email protected] T: 1800 37 26 28

http://www.comlaw.gov.au/Details/F2014L01472

insights into franchising or licensing your business 270315 bklt

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