DLA Phillips Fox on franchising

According to DLA Phillips Fox , many people are keen to take on the challenges of owning their own small business, or interested in expanding their current business. Unfortunately, small business often finds its ability to grow is limited by the constraints of capital, geography and extension of management and employee capacity. Overseas expansion has the further constraints of different legal and tax systems as well as cultural and regional influences. However, franchising offers numerous advantages to both the franchisor and the franchisee. It is a proven way for many small businesspeople to expand their business successfully.

Essentially, a franchise is a business relationship where the franchisor gives the franchisee:

· The right to use its trademark, brand names and other intellectual property.

· Knowledge and training about prescribed business, marketing and technical plans and systems, with the expectation that they will be followed.

· Help with planning, implementation and operations for the duration of the relationship.

Advantages for the franchisor

· Franchising affords the opportunity for small business to become big business.

· It allows a business to expand with reduced capital input yet maintain the protection and integrity of its intellectual property and systems.

· As franchisees have invested their own money into the business, they work hard maintaining the franchisor’s standards and work to achieve maximum profit – a real ‘win/win’ situation.

· Bulk products/service discounts may be available due to the number of businesses. If the franchise grows (i.e. to critical mass), so does its ability to negotiate better deals.

· The franchisor obtains the benefit of secure outlets and wide distribution while maintaining the advantage of centralised management. New technology makes this a reality at reasonable cost, rather than a pipe dream.

· Promotes brand recognition and the value of goodwill on the balance sheet.

· The relative efficiencies of franchising allow innovation and promotions that small business can often not afford.

For the franchisee

· The franchisee gains access to the franchisor’s experience and is able to enter into a business venture with a proven product or service and an established, tested system of operation.

· The franchise gains the opportunity to trade in a larger business with the support of extensive marketing arrangements normally beyond the financial and organisational capacity of a small business. Discounts on goods and services may be available to the group, giving the franchisee an advantage on the expenses side of the ledger.

· Ongoing management assistance and training reduces the risk of failure (enhances the prospects of business growth)

· Management, financial and operations manuals.

· The better franchisors also provide market research and development of new and/or complementary products. This means that the franchisee can keep up-to-date with the best products and trends in the industry without incurring significant research and development expense.

One of many successes

Lenard’s Pty Ltd is an example of one successful business that has grown through franchising. This franchise was started by Len Poulter, a Melbourne master butcher who opened his first shop in Sunnybank, Brisbane in 1987. Poulter anticipated the increased demand for pre-prepared fresh poultry products (i.e ready to cook). Some 18 years later in 2005, Lenard’s will open its 195th store. The network now extends into New Zealand, with expansion to other countries imminent.

Tread carefully

While franchising offers a good start for an investor or an established businessperson looking to expand, like all business opportunities there can be pitfalls and financial traps for the unwary.

It is vitally important that prospective franchisors wanting to expand their business (or potential franchisees) get good professional advice from their accountant and a solicitor with real experience in franchising.

Summary

Franchising enables a group of similarly motivated people who believe in a system and a product to establish a relationship that results in a win/win scenario. The more money the franchisee makes, the more money and success the franchisor shares. Just think of a few well-known businesses and you will soon see how many of them are actually a franchise.

Read more on buying a franchise and running a franchise.