Franchising was barely heard of in Australia until the early 1970s, when the first McDonald’s fast food restaurants opened its doors.
As trends go, this was a doozy. Today, there are more than 750 McDonald’s outlets in Australia alone, serving meals to over one million people every day. Over the same period, franchising has grown into a $153 billion industry* which encompasses many of the country’s most familiar and successful brands.
Of course, there have also been brands that flared brightly for a moment before disappearing without trace, taking their franchisees’ investment with them.
So how can you be sure that the franchise you’re considering will be a winner over the long term rather than a flash in the pan?
A WINNING FRANCHISE?
“You have to think about whether the business concept is likely to be popular in 10 years’ time and, to some extent that will be a judgement call,” says Michael Paul, CEO and founder of Pack & Send International and chairman of the Franchise Council of Australia.
“But you also need to remember that, when you purchase a franchise, you’re buying a business system as well as a product. If you look at McDonald’s as an example, many people could cook a good hamburger but what makes McDonalds stand out is the quality of the business system that underpins the whole operation.”
Greg Hodson, franchise leader at PwC Australia, points out that trends tend to be associated with changes in society, such as the growing focus on health and wellbeing which is currently being driven by an ageing population.
“A business related to a positive societal change is more likely to be around for many years than one based on a product that happens to be popular at the time,” he says.
”We’ve also done quite a bit of research on sustainable businesses and found that long-term success is more closely associated with riding what’s known as a growth escalator than creating one. That means you don’t have to be first in to benefit from a trend.”
ACCEPTING THE NEED FOR CHANGE
Many businesses fail because they are either unable or unwilling to change.
“Most franchises are looking for a steady and reliable stream of revenue over the long term rather than some kind of ‘get rich quick’ scheme but you still have to understand that change is a constant,” says Paul. “The external environment is continuously reshaping itself and a successful business will be flexible enough to adapt.
“For example, products typically reach a level of maturity and the business must accommodate that in order to survive. McDonald’s started out without any intention of selling coffee but now they have almost as many McCaf_s as restaurants.”
A sustainable franchise will focus on customers, not a product or service.
“You can only keep pace with customers’ changing needs if you know what they are,” says Paul. “The most successful franchises have a business model which allows them to respond quickly to changes in the market place.”
DUE DILIGENCE
David Newhouse, an accredited business law specialist and franchising lawyer of Newhouse & Arnold Solicitors, believes that most fads will unravel under the scrutiny of proper due diligence.
“Prospective franchisees need to be very clear about what they’re getting themselves into,” he says. “They need to get a feel for the business, to understand the financial and market constraints and most of all, feel confident that they can develop a strong relationship with the franchisor.
“Due diligence will often bring to light issues that the franchisor hasn’t thought about or properly understood, such as the impact of established competitors, financial models which can’t be supported or a lack of comprehensive, workable systems.
“But that doesn’t mean it’s impossible to lead the way with a unique or novel product. Even in the early stages of their business, good franchisors will have well-thought-out systems and detailed research to support the business model.”
* Source: IbisWorld Franchising in Australia: Market Research Report, November 2013
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