“The more I help others succeed, the more I succeed” – Ray Kroc, McDonald’s Founder
As chartered accountants who have had the privilege of guiding numerous business owners through their entrepreneurial journeys, we recognise that purchasing a franchise is a thrilling yet complex endeavour for any aspiring business owner.
At Bishop Collins, we firmly believe that no one should feel isolated in their business journey. We are here to help guide you in navigating the intricate landscape of franchise ownership in Australia.
This article is designed to provide you with valuable insights into the critical elements of franchise purchase.
You’ll gain a deeper understanding of what a franchise business model provides, learn how to evaluate various business opportunities, and discover how to make well-informed decisions that will set you on the path to your own business success as a franchise owner in Australia.
Understanding Franchise Businesses in Australia
A franchise business model offers aspiring business owners the chance to operate under an established brand with proven systems and processes.
In Australia, the franchise sector is a vital part of the economy, with over 1,200 franchise systems nationwide, offering diverse franchise opportunities for potential franchisees.
What is Franchising?
Franchising is a business structure where an individual or group (franchisee) pays a licensing fee to trade using the branding, trademarks, products, suppliers, and systems of an established business (franchisor).
This arrangement allows the franchisee to operate a business with a proven business model, leveraging the established brand and ongoing support from the franchisor.
Unlike starting your own business from scratch or buying an existing business, franchising offers a lower-risk option for entrepreneurs. By adopting a business model that has already demonstrated success, franchisees can benefit from the franchisor’s experience, resources, and market presence.
How Does a Franchise Work?
When you buy a franchise, you’re essentially purchasing the right to operate a business under the franchisor’s brand and system. This includes:
- Access to established business systems and processes (like McDonald’s detailed operating procedures)
- Use of the brand name and trademark
- Ongoing support and training
- Marketing and advertising assistance (such as Boost Juice’s national marketing campaigns)
- Supply chain and operational support
Benefits of Buying a Franchise
Buying a franchise offers several compelling benefits for aspiring business owners:
- Proven Business Model: Franchisees gain access to a business model that has been tried and tested, reducing the uncertainties associated with starting a new business.
- Established Brand: Operating under a well-known brand can attract customers more easily than building a brand from the ground up.
- Ongoing Support and Training: Franchisors provide continuous support and training, helping franchisees navigate challenges and maintain operational standards.
- Lower Risk: Compared to starting a new business, buying a franchise typically involves lower risk due to the established systems and support provided by the franchisor.
- Network Opportunities: Being part of a larger network of franchisees offers opportunities for collaboration, shared learning, and mutual support.
These benefits make buying a franchise an attractive option for those looking to enter the business world with a higher chance of success.
Key Considerations Before Making Your Purchase
Financial Considerations
Before diving into franchise ownership, it’s important to first understand the financial implications. The Australian Taxation Office (ATO) outlines several tax considerations for franchisees, including:
- Initial franchise fees
- Ongoing franchise fees and royalties
- GST obligations
- Income tax responsibilities
- Capital gains tax implications
Due Diligence Checklist
As your business advisers, we recommend thoroughly investigating these aspects:
1. Financial Performance
- Historical financial statements – Review at least three years of profit and loss statements, balance sheets, and cash flow statements of a comparable Franchisee location to identify trends and potential red flags
- Projected cash flows – Examine weekly and monthly projections for the first year, including seasonal variations and potential quiet periods
- Working capital requirements – Calculate specific amounts needed for stock, staff wages, rent, and other operating expenses for at least the first six months. Your Franchisor should supply you with these numbers. Review these with the help of a Chartered Accountant to ensure they are realistic and supported by evidence of other franchisee operations in comparable locations.
- Break-even analysis – Determine the exact sales volume needed to cover all costs, including franchise fees and loan repayments
2. Legal Documentation
- Franchise agreement – Review key terms including length of agreement, renewal options, and performance requirements with particular attention to termination clauses
- Franchise disclosure document – Examine the franchisor’s financial position, history of disputes, and current franchisee network details as required by the Code of Conduct
- Territory rights – Understand specific geographical boundaries and any online trading restrictions, including protections against other franchisees in your area
- Exit conditions – Evaluate goodwill payments, asset transfer requirements, and non-compete clauses that might affect your ability to sell or leave the business
3. Market Analysis
- Local competition – Map out direct competitors within your territory, including other franchises and independent businesses offering similar products or services
- Target market potential – Analyse local demographic data including income levels, age groups, and spending patterns that align with your franchise’s target customer
- Territory demographics – Review population growth projections, local development plans, and changes in area demographics that could impact future performance
- Growth opportunities – Identify potential for multi-unit ownership, territory expansion, or complementary service additions within your agreement’s terms
Examples of Common Franchise System Arrangements
To better understand how franchises work, let’s explore two common arrangements in a bit more detail:
McDonald’s: The Global Fast-Food Giant
McDonald’s is an iconic example of a business format franchise agreement, where franchisees receive a complete blueprint for running the business, from operational systems to marketing and menu offerings.
- Support: Franchisees benefit from McDonald’s extensive training programs, global brand recognition, and ongoing operational guidance.
- Investment: In Australia, the initial cost to open a McDonald’s franchise can exceed $1.5 million, including the franchise fee and fit-out costs. Additionally, franchisees pay ongoing royalties based on gross sales.
- Commitments: Franchisees must adhere to strict operational standards, use approved suppliers, and follow corporate branding guidelines.
Jim’s Group: A Trusted Australian Brand
Jim’s Group is a homegrown Australian success story offering a variety of mobile service franchises, including Jim’s Mowing, Cleaning, and Dog Wash.
- Support: Franchisees gain access to a well-established customer base, marketing systems, and training programs tailored to the specific service industry.
- Investment: With upfront costs starting as low as $20,000 for some divisions, Jim’s Group is an affordable entry point for those new to franchising.
- Commitments: Franchisees operate under the Jim’s Group name and adhere to service quality standards. However, they often have more operational flexibility than business format franchises like McDonald’s.
These examples highlight the diverse opportunities in franchising, from structured systems to flexible arrangements.
Franchising Code of Conduct
The Franchising Code of Conduct is a mandatory industry code under the Competition and Consumer Act 2010 designed to protect franchisees and ensure fair dealings in the franchise sector. Administered by the Australian Competition and Consumer Commission (ACCC), the Code establishes essential guidelines for franchisors and franchisees, particularly for transparency during the pre-contractual phase.
Under the Code, franchisors must provide prospective franchisees with five key documents at least 14 days before signing a franchise agreement or paying any non-refundable fee. These documents are:
- The franchise agreement
- The disclosure document (containing critical details about the franchise system, costs, and obligations)
- The information statement for prospective franchisees (outlining key risks and considerations when entering a franchise agreement)
- The Key Facts Sheet (a summary of key financial and operational information)
- A copy of the Franchising Code of Conduct
These requirements ensure that prospective franchisees have sufficient time and access to all necessary information to make informed business decisions before committing to a franchise opportunity.
Tax Planning for Your Franchise Agreement
The ATO provides specific guidance for franchise businesses. Here are just some of the key tax considerations, but it is always best to seek the guidance of a tax professional like Bishop Collins to ensure you are maximising your tax deduction and minimising your tax liabilities:
Deductible Expenses
- Initial franchise fees (usually capital in nature)
- Ongoing franchise fees
- Training costs
- Marketing contributions
- Equipment purchases
GST Considerations
- Registration requirements
- Reporting obligations
- Input tax credits
Owning Your Own Business: Making Your Decision
When evaluating a franchise agreement, here are a few things to consider before jumping in the deep end:
1. Self-Assessment
Reflect on your skills, interests, and financial capacity. Owning a franchise demands dedication, adherence to established systems, and often a substantial financial investment. Ensure that the franchise aligns with your personal and professional goals.
2. Research the Franchise
Investigate the franchise’s market presence, financial health, and reputation before entering a franchise agreement. Engage with current and former franchisees to gain insights into their experiences and assess the level of support provided by the franchisor.
3. Understand the Costs
Beyond the initial franchise fee, be prepared for ongoing expenses such as royalties, advertising levies, and operational costs. For example, franchises like 7-Eleven may require significant investment but offer benefits like guaranteed income, which can offset initial costs.
4. Legal and Financial Advice
Consult with professionals to review the franchise agreement, disclosure documents, and financial projections. This step is very important for understanding your obligations and the franchise’s legal framework.
5. Training and Support
Evaluate the training programs and ongoing support the franchisor offers. Comprehensive training is vital for understanding the business operations and ensuring consistency across the franchise network.
How We Can Help
At Bishop Collins, we specialise in helping business owners make informed decisions about franchise agreements. Our expertise includes:
- Financial due diligence
- Tax structure optimisation
- Business planning
- Ongoing accounting and tax compliance
- Wealth management strategies
Moving Forward with Buying A Franchise
Making the decision to buy a franchise is exciting and, at times, overwhelming. But you don’t have to navigate it alone.
Our experienced team at Bishop Collins has the expertise to guide you through each step of the process, ensuring you make informed decisions that align with your goals.
Ready to explore franchise ownership? Contact our team of experts at Bishop Collins. We’ll help you evaluate your options and create a strategic plan for success.