Let’s start at the beginning. Franchising as a concept has been around for decades and began, as many ideas do, in the US. The earliest franchising was product franchising which, according to online encyclopedia Wikipidia, was initiated by Isaac Singer to distribute his sewing machine in the 1850s; Coca Cola’s product expansion was a more successful early franchise. Modern franchising began in the 1930s with quick service restaurants and the concept has now infiltrated 70 countries. Franchising can embrace vehicle dealerships, product distribution, a co-operative of retailers purchasing from a wholesaler, and the most common structure, a standard business format. And the standard business format is what we are dealing with here.
At its heart, franchising is all about individuals buying into an existing business system and profiting from the expertise, branding, resources and training provided by an organisation which has already ironed out many of the difficulties of trading. It is about running and owning, in many cases for a specified time, your own business and having some level of control over what you do and when you do it; although the degree of flexibility will vary from system to system with some deploying quite rigid rules of operation, other businesses allowing for greater individual input.
Franchising means starting up your own business with brand awareness for the product or service on offer already established; the measure of branding is heavily dependent on the length of time the business has been in operation and how strong the marketing collateral has been – in general the greater the number of franchises in a system, the stronger the brand recognition will be.
There are some strong brands in the Australian franchising arena and beyond; the following brands include some level of franchising in their business or are, like the Franchisor of the Year 2008, 7-Eleven Stores, entirely franchise focused and have all recently been featured in the BRW Australia’s top 1000 enterprises (judged by revenue above $242.2 million). In descending order of revenue these companies are ANZ Banking Group, Caltex Australia, Harvey Norman, Flight Centre, 7-Eleven Stores, McDonald’s Australia, Mitre 10 Australia, Goodyear, Franklins Supermarkets, Quick Service Restaurant Holdings (which includes chicken brands Red Rooster, Chicken Treat and Oporto), Yum! Restaurants Australia (KFC and Pizza Hut), Bridgestone, Gloria Jean’s Coffees, Bing Lee Electricals, Video Ezy, Cartridge World, Forty Winks and Autobarn.
For Haydar Hussein, who started out as a franchisee and is now the divisional franchisor at Jim’s Cleaning Group, there is no doubt that franchising works. “Franchising makes a lot of sense to me because every person involved within the business is working for the same goals. Every time a new client is added to the business all franchisees benefit from this goodwill. Collectively you can achieve targets quicker. This year the Jim’s Cleaning Group turned over $35 million compared to last year’s $18 million turnover. These results speed up public recognition and help keep our business top of mind .There is no way a private business in this industry can do that.”
As Kristie Piniuta, a lawyer with legal firm Hall & Wilcox, points out: “Although there is no guarantee in business; a franchise is likely to be less risky than a start up business. This is because you buy into a brand with a national marketing fund, receive training, an operations manual, visits from field managers and an opportunity to learn from other franchisees.”
In today’s business world the competition for the consumer dollar is fiercer than ever, cautions Byron Smith, franchisor of MYO, and the ability to gain an edge over your competitors can be the difference between success and failure especially in the current global economic environment. "Franchising is a business model that gives you access to market research, marketing, business development, financial benchmarking and industry analysis all with a proven business operational system. If you are in an industry which allows you constant access to these professional tools then this must certainly put your business ahead of the game because it allows the owner to focus on the most important part of their business – the customer.”
The franchisor role
The DIY lunch bars franchise, MYO, was recently relaunched with Byron Smith at the helm. Smith believes assisting a franchisee to reach their personal and business goals is one of the most rewarding experiences and an essential part of any franchise culture. “These become the measures of trust, achievement and passion which are key factors for any business to succeed,” he indicates. “Some people believe that the marketing and the system are the two vital ingredients to the franchise. I believe these are critical but the real hidden elements within a franchise business are business development and the culture. As a franchisor our most important role is to work with franchisees to constantly look at improving their business by helping them reach their personal and business goals. Working on all of the essential areas of the business and improving these by just one per cent can take an average business and make it an exceptional one.”
This is achieved by the franchisor meeting with the franchisee and working together on the business. It is about constantly reviewing it with the franchisee to look for those one per cent opportunities and develop action plans and strategies to assist the franchisee to achieve these, he says. “There is also the broader franchisor role of driving strategic vision and making sure through constant innovation and brand marketing that within today’s market and economic climate a small business has relevance, all the while creating an environment that allows the franchisee to have fun running their business.
"The drive to achieve all of these goals in our franchise systems helps all sides of the franchise. This is why franchising makes sense,” he adds.
"Good franchising makes sense when you have two committed parties prepared to take a leap of faith in a commercial marriage or relationship for the betterment of each other not individually,” agrees Dean Salomone of Franchise Careers. Salomone highlights the need for clarity of expectation and an understanding of each party’s role and responsibility in the relationship.
"You are only ever committed in a commercial marriage when both parties have made a fully informed decision. For franchisors that means you accept and embrace the fact that your role is to constantly refine your business model and support tools with a view to maximising franchisee profitability. "
Tangible benefits
"On the flip side, franchising makes good sense for informed franchisees as they will clearly understand what direct areas of control they have in their business and they will focus a good deal of their energies there as this is where they can make a difference, while knowing they have their franchisors support (if needed).”
Michele Laks-Belzycki, a senior associate in business law at Macpherson and Kelley, suggests everyone knows that franchising provides access to brands and resources but it also offers other tangible benefits for both franchisors and franchisees. “Like any other small business owner, franchisees are in control of their own destinies. But franchisees have the advantage of having tried and tested systems in place to help them succeed. If, for whatever reason, the franchise business is struggling, then the franchisee can also rely on the experience of the franchisor to help turn the business around. "Particularly in these tougher economic conditions, business owners want someone who has been there and done it before and can give assistance or make suggestions about how to overcome any issues."
She believes an experienced and franchisee-focused franchisor can be all that stands in the way of a failed business. Franchisees should be encouraged to seek help and franchisors should be on the look out for the early warning signs in a franchisee who is not performing, she says.
So what are the reasons for franchising to continue to attract new companies and new blood? Says Piniuta, from the perspective of someone looking to become a franchisor, it is one of the quickest ways to expand and achieve national brand exposure. Fellow lawyer Laks-Belzycki reflects on the role of franchising in company expansion. “We have worked with many franchisors that have started franchising in order to overcome the burden of having to employ and maintain very large workforces, which requires a substantial financial investment, in order to foster and support growth. Through franchising, responsibility for employees and related logistics can be shifted to franchisees, which gives the franchisor the ability to work on the business and brand and in supporting expansion through franchisees rather than managing a workforce.
“Franchisees are at the coalface and are better equipped to manage the day to day running of each territory or business unit rather than a franchisor attempting to do so from a (sometimes distant) head office or through complex (and costly) logistical arrangements and management structures,” she adds.
Rules, rules, rules
Despite the negative publicity that can surround franchising, the sector is highly regulated. There are challenges in working within a regulated industry. And, says Piniuta, it can be expensive to operate in the legal constraints. However, there are some positives for franchisors and franchisees alike. "For prospective franchisees, it reduces the risk of the unknown as the franchisor is required to provide them with a disclosure document prior to them paying non-refundable money or entering into a binding franchise agreement.
"For the franchisor, this means prospective franchisees understand the franchise system, what is expected of them and what support the franchisor is willing to give prior to them signing a binding franchise agreement.
“In addition to this, franchisors are obligated to keep a ‘tidy house’ due to the fact that it is nearly impossible for them to be able to comply with the Trade Practices (Industry Codes –Franchising) Regulations 1998 (Franchising Code) without setting up watertight pre-franchise processes and procedures.”
While there might be rules and regulations in place (a recent inquiry by Federal Parliament has resulted in recommendations for statutory obligation for good faith negotiations between franchisors and franchisees, and fining breaches of the code of conduct) there are no guarantees that a franchise business will be successful; there are risks attached, as with any business. But franchising provides a tried and tested structure, franchisor support and a network of other franchisees to learn from. That’s a good start.