Part
Eleven - Franchising
What
is Franchising?
Franchising
comes under the broad heading of licencing, which covers
any contractual relationship from the right to use trademarks
to the right to distribute a product.
Franchising
in Australasia these days generally refers to a business
operation that licenses the right to use a name, product,
service, or business system, usually within a defined
territory, in return for a fee.
Franchising
covers many different sectors of the economy; we are
all familiar with the fast food sector. But the system
also covers Home services, Financial services, Training
and Retailing, to mention just a few.
Franchising
implements many different structures and modes of operation.
Generally, the in-going costs include a portion of goodwill
or franchise fee. This fee gives you the right to copy
the success formula of the franchisor. The fee can range
from $1,000 to $1,000,000 depending on the potential
earnings of the business, the length of the term or
tenure of the franchise, market price, the risk involved,
the amount of competition and the overall return on
investment. The other costs will cover the assets required
to run the franchise as your business. An on-going fee
or royalty is usually charged as a flat fee or a percentage
of turnover. This gets paid to the franchisor to cover
advertising (usually national coverage) and a profit
margin for the franchisor.
You
can expect to have a documented procedure guide to follow
that outlines how to run the business and the Franchisor
is generally on hand to offer help. After all it is
in he/her best interests to make sure you succeed.
The
reason I am so keen on franchises as a concept, and
as a great way to get into business yourself, is its
success rate. In a 1992 survey by accountants Arthur
Andersen and the Franchise Association of Australia
and New Zealand (New Zealand is now independent), the
5-year survival figure for franchise outlets was 92%.
In 1993 it was 82%. In contrast, the 5-year survival
rate of independently started small businesses is down
around the 30 - 35% level.
Three
of the major banks in New Zealand (ANZ, National and
WestpacTrust) know that franchises in New Zealand turned
over approximately $6.5 billion last year. They have
a low failure rate and are a growing way of doing business
worldwide. Perhaps that is why they are prepared to
lend up to half of the purchase price against the franchise
itself. Selected franchises have the following characteristics,
they have been around at least five years, have a reasonable
number of outlets and the vast majority of their franchisees
are trading with good levels of profit.
Some
facts taken from a survey of Franchising in New Zealand
in 2000.
