Running a franchise business can be highly profitable for all involved, but it is a long-term financial commitment.
All franchisors should ensure they understand the legal regulations and financial obligations that fall on them at the outset. Below, we set out the costs associated with franchising for potential franchisors so you can better answer the question, ‘can I afford it?’
Franchising is tightly regulated in Australia and it can be complicated to navigate the requirements laid out in the mandatory Franchising Code of Conduct. Potential franchisors should be aware of the legal regulations as well as financial responsibilities before embarking upon the franchising route.
Upfront, franchisors are required to prepare a franchise agreement, a disclosure document, and an operations manual. These documents should comply with all the Code of Conduct's requirements, including disclosure of all actual or potential associated costs for future franchisees for example:
- Fit-out of the premises
- Yearly updates and audits of the disclosure document
- Tax and business structuring advice
- Trade mark registration fees
- IT fees (engaging and implementing a Point of Sale (POS) system as well as an accounting system)
The disclosure document should where possible provide a numerical range for all fees incurred by the franchisee. It is a good idea to consult a business advisor or lawyer during this process.
Franchisors should note the following costs:
Operational costs
From an operational perspective, franchisors will require capital to develop recruitment procedures, promotional materials as well as training and induction systems. You may also have to spend money on developing training programs and any necessary software. These costs vary and are specific to the industry that the franchise business operates in.
Trade mark costs
The use of your business' brand is critical to developing a successful franchise system. As such, it would be wise to invest in protecting your intellectual property, such as registering your brand's trade mark.
Ongoing costs
It is also the franchisor’s responsibility to monitor and develop the franchise system. This can include costs associated with suppliers, annually updating the disclosure document, marketing fees and providing ongoing development for franchisees. As most franchise terms are usually from five to 10 years, it is essential that these ongoing costs have been well planned and understood.
Franchisors should carefully weigh the associated risks and costs as the franchise business grows.
Other costs
As the franchisor, you may also wish to restrict supply arrangements for potential franchisees to maintain quality and consistency throughout your franchise business as well as potentially save costs. Here, it is your responsibility to ensure your business is compliant with the obligations set by the ACCC (Australian Competition and Consumer Commission), and where required, to lodge an application for exclusive dealing.
If you are thinking of turning your brand into a franchise business, you should consult with your financial advisor or accountant to ensure your business is prepared for the expenses involving with franchising your business.
The costs involved with setting up the franchise, along with yearly reviews and audits of your disclosure document and marketing fund, applying to the ACCC for exclusive dealing and registering your trademarks can add up quickly. Practically, take care not to deter potential franchisees by having them shoulder the majority of the costs involved with buying a franchise.
It is also prudent to speak with a legal professional to better understand the regulations and costs associated with the process.