Buying A Franchise? Tips to Get Started
Have you ever wondered how some businesses can have branches all over the country – or the world? Many times, it’s not a centralized office that runs everything. A lot of ‘local branches’ are actually franchises. These are individual, independent business that trade using the same brand name and brand resources, while promising to maintain brand standards and share their profits with their brand HQ.
There are different kinds of franchise systems. The most common is a business model franchise. It ensures that – for example – your burger tastes exactly the same whether you buy it in Darwin, Perth, or Cairo. To ensure uniformity the brand will give you access to manuals, training, quality assurance techniques, marketing channels, and support.
It’s the most popular option in Australia, because you essentially receive a starter pack and the option to ‘phone a friend’ at Head Office whenever you need to. The business model is common with food chains and direct services like automobile detailing. However, if the ‘franchise’ is car rental or banking, the more common choice is an Agency Agreement.
Franchise Types
In these models, the ‘branch’ simply distributes the products or services of their ‘franchisor’ with no responsibility or liability in terms of consistent quality. Under legal statutes, it’s not strictly considered a franchise. In the field of electronics, car sales, and related products, a similar option is selected. You sign up to be an Authorized Dealer, which means you offer the franchisor’s goods and services, including warranties and customer support.
Dealers don’t necessarily have to offer uniform service, but they create a direct link to the original brand, so there’s broader liability than agency arrangements. Then there are distributors, who are like dealers, except they work wholesale. It’s mainly a collection point, so there’s minimal liability for the ‘warehouse’. The distribution model lends itself to confectionaries, food products, fuel, and software. They can escalate customer complaints, but they never get directly involved if something goes wrong.
Finally, you can sign up as a licensor or manufacturer. This applies when the brand doesn’t (or can’t) have a physical presence in your locality, so they give you their ‘production formula’ and you manufacture on their behalf. When you’re buying a franchise, be clear on which of these models you’re signing up for, because their legal terms are vastly different.
Advantages of Franchising
Why would you want to buy a franchise? Well, it generally needs less capital than starting a business from scratch. The brand already has market positioning and a reputation of its own, so you don’t need to actively sell it. Franchise brands generally have a marketing machine in place, and will give you full access to all its tools, helping you tailor it for your locality.
This widens reach, expands market share faster, and develops an effortless customer base. Middle managers can expand into franchise owners, so it offers career growth. It enhances buying power, allowing owners to easily scale their franchise. For investors, there’s a higher ROI for less risk, and quicker turnaround for profit and penetration.
Given all these benefits, you need to get the right franchise agreement so you can maximise returns. After all, the franchise is designed to the advantage of the franchisor, so as a buyer, you need a good lawyer to skew things in your direction. If you can work with a law firm that deals exclusively with franchise deals. They have more experience in getting better terms.
What Your Franchise Lawyer Does
It’s important to know that when you buy a franchise, you’re not becoming an employer, employee, tenant, landlord, mortgager, partner, lender, borrower, or cooperative partner with your franchisor. You are simply using the brand name to supply their brand products and services for profit, and giving them a portion of returns.
These returns can be in the form of a capital investment fee. They will give you the money to start, and you’ll repay their investment loan with interest. You might be required to give your franchisor a percentage of overall sales. And you might have to pay them for training or discounted raw materials. Both these measures are for consistency and quality control. Your lawyers will also look into more technical factors, like the lease agreement on your business premises, branding charges, fixtures, and any necessary construction work or furnishing.
Get a lawyer involved from the beginning. They’ll help you with designing a suitable franchise agreement, negotiating payment terms, renewal or termination of agreements, resolving disputes with your franchisor, and dealing with your finances in case your franchise has a slow start. Lawyers are essential if you need to transfer your franchise rights, or if you want help with the building and branded business vehicles.
