Amie Larter
Hello and welcome. My name is Amie Larter and this is Buying a Franchise podcast. Vital listening for anyone interested in buying or that’s in the process of buying a franchise.
Today I’m joined by Sarah Stowe, editor of Franchise Business and Franchise Executives and today we’ll be looking at whether a franchise purchase is right for you. So Sarah, is a franchise the right solution for everyone looking for financial independence or are there some people who are just right for franchising and others who would struggle in that sort franchise format?
Sarah Stowe
Hi, Amie. I think that’s a great question. In my view, yes, some individuals are suited to the rigours of franchising while others would struggle in the constraints. I if we think about what franchising is, it’s simply a way of replicating a business model with the aim of also replicating the success the initial business has achieved. Replication inevitably means things are the same. So to maintain that consistency across numerous stores or service businesses, the operators need to abide by the guidelines that have forged the business model. That could be using branded napkins or an approved chicken supplier, for instance, if you’re in a fast food restaurant, or it could be keeping a branded van clean and tidy, wearing a uniform if you’re in a service business.
So fundamentally franchisees need to use the operating systems that underpin the business. Follow the operations manual, sustain brand standards, and follow regulations such as health and safety and workplace laws. So first and foremost, a franchisee needs a willingness to abide by the rules. For many new business owners, the opportunity to have systems and branding in place is a huge attraction. So there’s no point in self-sabotaging by ignoring the very things that have helped to build the brand’s success.
Now, I’ve spoken to so many franchisees over the years. And when talking about their success, the most frequent comment I’ve heard is, I just followed the system. Really simple, I just followed the system. So being, I think being a successful franchisee is a bit of a balancing act. You need enough entrepreneurial spirit to seize and to create those opportunities to grow your business. But you do need the discipline to operate within the constraints of a branded operation.
So I think that’s the starting point for me. Check yourself and how you like to work and whether or not you have a compliance mindset.
Amie
Okay, so let’s assume you are someone who fits the franchisee mold. You have that compliance mindset per se. I’m interested in whether there are other personal considerations outside that willingness or personality that would influence the decision to buy a franchise.
Sarah
Yeah, personal circumstances do have an impact on whether this is the right time to buy for instance. Your health, for instance. Running your own business, whether you’re a sole trader or have a team of 10, is a commitment of energy and enthusiasm and considerable time. There are some exceptions to this. Some business options are investor models and others are part-time commitments. But the reality is there will still be plenty of demands on your time and energy.
So being fit and healthy, particularly if the work is physically demanding, sets you up to sustain the levels of commitment you need. So if you extend that premise, it’s really beneficial, if not crucial, in fact, to have the support of your nearest and your dearest in your business venture. So the challenges of business ownership are tough enough without having to deal with unsupportive friends and family who undermine or maybe test your commitment.
And that’s why I think one of the reasons most franchisers like to meet with partners in the interview stages of recruiting franchisees, it’s an opportunity for them to gauge whether the partner is on board with the idea and it’s a great way for the partner themselves to get a great idea of what’s involved in running the business.
I think understanding the end goal and the path to get there can help you decide what’s viable, the circumstances are right for you. You may need to adjust your expectations depending on how much energy and time you have and of course money.
Amie
And I suppose from a franchise perspective, there are so many different franchises that you might be looking for something that has a huge time investment and there’s some that are far more time intensive than others.
Sarah
That’s very true. you’re going for anything that is a full-time role, if you like, if you think of it as a career, anything that’s a full-time role, it’s going to demand a lot of your time because not only is there the job of running the store, for instance, but you’ve got the admin behind it. You’ve got all the back office work that needs to be done, the ordering of supplies, the management aspect that may not get done during the day.
And it’s the same if you’re in a service business, you’ve got a van, you’re a mobile business, there’s always something extra to do beyond what we see in the role. And so think it’s very important that people take that into account. And that’s why sometimes people will choose to do a part-time, take on a job, take on a franchise that is part-time, but has the capacity to build up to full-time. And that enables them to stretch themselves as and when they have the capacity to do so.
Amie
and you know this much better than I, Sarah, but do people get into franchising purely from an investment strategy point of view as well, like completely hands off?
Sarah
Some people do, and there are some models that favour that particular process, but generally speaking, the vast majority of franchisors want people who are going to be investing their time, as well as their money, and their commitment into the business. They like people to understand what the business is about. So, vending businesses, for instance, are sometimes investor, almost only kind of investor models. There’s a minimum amount of time involved. And there are some gym models that you can kind of invest in and get managers and whole teams to kind of run the business.That’s much rarer than an owner operator model where your time, your sweat equity, if you like, is very much part of the business model.
Amie
Yeah, which makes sense. Now, Sarah, I’ve just got to ask you about this. We’ll come back to the money aspect in a minute, but let’s talk about a franchise buyer’s expectations, Sarah. And I’m quite sure that you’ll have seen it all in your time reporting on franchising, but it’s really important to, and I mean, this is just like starting and running any business, that someone considering buying a franchise has a clear expectation and understanding of what’s involved, I suppose.
Sarah
Yeah, expectations are really crucial. It’s kind of a strange thing to say, isn’t it, your expectations? I think, I mean, we’ve all got expectations about what’s involved in something. And if those expectations are just kind of slightly misaligned to the other partner’s expectations in any situation, that’s where we always stumble. And it’s no different in business. I think, for instance, when people know very little about franchising, it’s easy to assume
the franchisor who provides the branding and the model and the support is going to be doing most of or a lot of the work. But it’s simply not true. Franchising doesn’t work like that. So while all these elements and the financial demands play a key role in a franchise success, so too does the hard work and commitment of the franchisee. And it’s important to think about how the franchise relationship works.
So despite, we’ve talked upfront about what’s involved in a franchise, but despite the branding on the van or the name on the shopfront or the chicken supplies that you’re getting through your franchise, this business is your business. And therefore you are responsible for it. You’re responsible for the bills, for following relevant government regulations, for recruiting and managing staff. You’re responsible for marketing your specific business, for following the brand guidelines and above all else, you are responsible for driving growth.
Now that isn’t to say that the franchisor won’t have ways to support you in these activities. Now there are processes and systems, supply chain management, a marketing team, IT support, a business development manager who can kind of guide you as you go through your business and point out ways to improve or opportunities. And of course there’s training, there’s training upfront, there’s usually ongoing training.
And these are all the valuable benefits of being part of a franchise. But the clue really is in the term. They are support functions. They are not the business. They are the support functions to help you do your business. And a franchisor, a good franchisor will help you work out the best way to maximise your sales. They will help you. They’ll have guidance on how do you roster your staff? How do you market to the local community? But as a franchisee, as a business owner, you have to be the driver.
It’s also worth noting, of course, that the franchise relationship involves certain obligations on each side. So it’s a great idea to do some research on what you can expect from your particular franchisor. Everyone will have a different expectation. And what the franchisor will expect from you. There are a lot of ways to ensure that these expectations are aligned with those of the franchisor
Amie Larter
and it’s important that you do that as you go through your due diligence. So going into a franchise with a hopeful attitude that everything will work out, it’s a great brand, everything’s gonna be fine, isn’t really gonna set anyone up for success.
You know, detail is important. And a franchising agreement is a legal contract. So franchise buyers really need to ensure they have as much insight as possible into the reality of operating a franchise with their chosen brand.
And I think talking to franchisees is a great way to assess how the franchisor behaves in different situations. You’ve got to think, it may not be always good. There might be problems that come up. How does the franchisor respond in those sorts of situations? And it’s worth mentioning here that franchising is governed by a mandatory code of conduct. And while it might be a dry read, reading the Franchising Code of Conduct is a good starting point for just understanding, getting to grips with how that partnership actually works.
Amie
Okay, that makes sense. So we’ve sort of, you’ve painted a very good picture, Sarah, of the type of mindset that’s required, the type of people that may be most suited to a franchise system.
I think though still one of the most pertinent questions for people will be how much does it cost? And so I’m keen to understand what financial backing does a franchise buy and need in order to really kind of think, okay, this might be an option for me.
Sarah (15:25.323)
Oh, you’re spot on there, Amie. Money is always uppermost in people’s minds. You know, how much does a franchise cost is absolutely the first question asked. And of course, there is no simple answer because investing in a franchise can cost from just a few thousand dollars for some of the smaller part-time operations to several million if you’re going into a big gym or a big fast food chain or a large retail operation.
But behind that the financial truth really remains the same that whatever the level you’re investing in you need access to enough money to buy the business and have working capital that can help keep you afloat in the first few weeks and months. So the starting point has to be what do have in the bank? The more money you can put in, the more skin in the game you have, the more comfortable both the franchisor and any lenders you will be approaching will be.
Now, of course, there are ways to access money beyond the savings that you’ve been squirreling away and many people do turn to banks or lending institutions. Sometimes they’ll take out a second mortgage to top up their money.
I think it’s important though to remember that loan repayments need to be part of the calculations that you and your accountant need to do to assess the viability of a business.
And just touching on that second mortgage, know, mortgaging a property is a major step. So while it might give you the financial capacity to fulfil your dream of buying a franchise, it doubles your risk. If the business fails, you risk losing your business and your home. It’s something to think about. So I think the key is being realistic and managing your expectations. There we are back to expectations.
If everything else aligns, but your finances really don’t, you’ve got two options. Postpone your franchise purchase until you have more savings and you’re better placed to buy that dream. Or alternatively, recognise that it’s time perhaps to trim your ambitions just a little. Now that might look like considering a different brand or a different sector to invest in or a part-time business option that enables you to keep your day job and have a second income.
Sarah
What isn’t really viable is overextending yourself financially. While it might be tempting to push out the budget, it seems easy when you maybe put the numbers on paper, it can lead to severe financial stress. Cash flow is quite often the undoing of many otherwise successful businesses. So it’s imperative for a new franchisee to have the necessary financial resources in place at the outset to avoid at the very least, that exhaustion of the constant financial firefighting. So I would say quite simply, if the numbers don’t add up for you, then now is not the time to buy a franchise. Maybe a little down the track.
Amie
That makes sense. So really when we summarise this area, we’ve got four considerations. We’ve got attitude, expectations, circumstances and finances.
Sarah
That’s right. I think those are good starting points. There are always lots of other elements that you can kind of bring to it, but those are the, what I would call the umbrella considerations. Fundamentally, there are two key reasons that people buy a franchise. It’s money and it’s lifestyle. And the lifestyle could be a relaxed lifestyle. The lifestyle could be, know, ambition and goals. But it’s important to remember that there are plenty of other ways that you can fund financial freedom. And it might be that another option will suit you better.
If you’re not sure if you’re thinking, you’re not sure of whether your personality is quite right, know, maybe look at other ways to achieve what your end goal is. Perhaps it’s a matter of timing and in a year or two, you’ll be perfectly placed to become a franchisee. But I think if you believe that you have the right compliance mindset, you have the personal capacity and the support required to run a business, you’ve got the finances that you need and you understand the extent of your obligations and your responsibilities, then you’re really well placed to start your franchise journey. And if you do decide to go ahead, it’s a demanding but very exciting path that you can follow and it really can change your life.
Amie
Thanks Sarah. In the show notes below we’ve got links and references if you want to follow this further and get more in-depth information before you continue your journey to buy a franchise. If you’re some way into your franchise search you might be ready to check out the franchise handbook that’s available on our website. Practical tips that can help you navigate the journey smoothly. Visit www.franchisebusiness.com.au for more information. We hope you can join us on another Buying a Franchise podcast. Thank you for listening.