There are many low-cost franchises on offer these days that can be attractive to someone who has been made redundant or just tired of your existing career path.
Many of these franchises are home services or mobile franchises which are affordable and you don’t need to mortgage your home to get into one.
Franchises come in all shapes and sizes and fit many budgets, and no two franchises (even in the same sector) are necessarily the same, so you need to carefully select the right one for you.
How do you select the right franchise for you?
Steps to consider
- Your Budget
Work out your budget and your risk profile – how much can you afford, or borrow, and how far do you want to stretch your borrowings - there is good and bad debt and borrowing or investing to go into a viable business that will generate income and build wealth is “good” debt. That is, you get a return on your investment.
- Prepare a business plan
Write down your personal goals, objectives, skills you would like to use (or new ones you want to learn), how long do you want to be in the business and, how that will affect your lifestyle and use the plan to assess which franchise aligns with your plan.
- Research
Select the franchise system that meets your criteria and prepare a short list of potential franchises to then investigate.
This should include talking to existing franchisees, focus on the up front and ongoing operational costs and potential earnings and ability to earn an income from your effort.
Prepare your own cash flow projections and ensure your cash flows include cost of goods, advertising and a salary for your efforts to ensure it is financially viable.
- Independent Legal and Financial Advice
Before you commit seek advice from a specialist franchise lawyer and accountant to minimise your risk.
As members of the Franchise Council of Australia (FCA) and the International Franchise Lawyers Association (IFLA) Sanicki Lawyers have advised many franchisees in various sectors for over 35 years. We know what’s going on … the good the bad and the ugly!
There are many tricks and traps which a Specialist Franchise Lawyer will be able to highlight, so you can make an informed decision before you commit.
Some of these relate to:
- whether you are given an exclusive area or territory to operate in, or just a site.
- whether the franchisor is able to compete with you online.
- is there is a marketing or Special Purpose fund you must contribute to.
- what extra costs you need to pay for IT, or management systems support.
- does the Franchisor supply goods and can they force excess stock onto you.
- does the Franchisor receive and share supplier rebates?
- check out the exit costs if you sell the business down the track.
- what training is offered and where.
- does the location work based on where you live.
- who generates the leads the Franchisor or is it all your own marketing?
- do the services or goods being offered have longevity or is it a passing fad.
- consider the impact of AI in the business over the next few years as this may have a positive or negative impact.
I was speaking to Jaimee Almond a Consultant and regular author and blogger on small business matters. Jaimee works with business owners daily with strategic planning and insights into the purchase of a business or planning to exit their business.
Jaimee had some wise words for prospective franchisees and suggests when looking at buying a franchise, don’t just fall in love with the brand, dig into the business system behind it.
The most important question to consider and ask a franchisor is: How will they help you launch your business successfully?
A successful franchise system will not leave you to figure it out alone. They will have proven launch playbooks, hands-on support, marketing campaigns, and clear performance targets for you.
Jaimee gives the example, in fitness franchises, where you need at least 150 members to make the business viable, for long-term success, so you need a franchisor who not only knows those benchmarks but has a step-by-step system to help you hit them.
Mobile v Fixed site franchises
Mobile Franchises
With a mobile franchise, the up-front franchise fee is usually the biggest cost (it could be as low as $8,000 up to $25,000.00 apart from the need to lease a vehicle, branding and equipment costs. The overall investment could therefore be around $30,000 to $100,000 (high end) to get moving.
The vehicle and equipment can usually be leased, which reduces the up-front capital outlay.
Many mobile franchisors charge a fixed weekly or monthly royalty rather than a percentage of gross turnover therefore, the amount payable from a franchisee’s gross turnover (not their profit) can range from 10% up to 14% all up.
A weekly fixed fee with a smaller franchise can be positive if the business is successful and growing but can otherwise be a fixed cost that becomes a debt to the franchisor if you are not actively working the franchise.
The working capital requirements for a mobile franchise are also lower generally than for a fixed site franchise over the first six or twelve months of operation.
Even though a mobile franchise has less up-front cost (which means less risk) that may also mean a smaller income or return and simply buying yourself a job. There is nothing wrong with that if you are content with that!
Key considerations for a mobile franchise are:
- Will you get an allocated and exclusive territory, or will the franchisor or other franchisees be able to sell to customers in your territory?
- Does the franchisor have a social media presence and “on line” policy and direct leads to you, in your territory? Is it fair and clear how the leads are allocated ?
- Is the territory near where you live? travelling across town to service your territory may become tiring and costly.
- Do you have to travel long distances within your territory to service clients for a small fee - in which case there may be little profit in each job?
- Can you still take time off and have a break without impacting on the business if you are a sole trader?
- What is the franchisors policy if you want to go on leave?
All in all, a low cost or mobile franchise may be a great option, but it won’t suit everyone.
Fixed Site
The franchise fee for a fixed site franchise maybe between $30,000 to $80,000 plus fit out costs, stock and a myriad of other costs so the start-up costs could be well over $250,000.00 to $500,000.00.
The royalty’s payable on the franchisee turnover generally ranges from 6% to10% plus a marketing fee of between 2% to 4%.
Therefore, the actual return on Investment (ROI) for a fixed site could take much longer than a smaller franchise simply due to amortisation of the costs over a longer period.
Again, you could lease the equipment to reduce the capital outlay but then you also need to ensure you have enough working capital and will likely have all of the costs of a fixed site such as rent and staff costs and Insurances to cover.
Whichever franchise you select the key measure of satisfaction will be financial (not lifestyle), that is can you take a reasonable wage for your effort and get a return on your investment (ROI) when you sell down the track.
Getting Good Advice
Our view is if the numbers do not look like they work up front walk away as there will be plenty of other opportunities where the numbers will work!
I advise my clients “good advice will cost you money, bad advice may just end up costing you a whole lot more” !
We see this regularly where a franchisee comes to us for advice after they have taken up a franchise and looking to exit and we find that they did not get any advice at all or they got advice from their local lawyer who did not have the expertise to advise the client properly.
Getting the right advice up front may save you thousands down the track so get the best advice from a Franchise Law Specialist before you commit to limit your risk and make an informed decision before you hit the road.
Robert Toth is Special Counsel and Franchise Specialist at Sanicki Lawyers with over 35 years of experience in franchise, licensing and distribution law. Robert is also an Accredited Commercial Law Specialist and regularly publishes articles on franchising in Australia and overseas journals and acts for overseas and local and master franchisors as well as acting in dispute resolution and mediations.
