Snap-on named one of Australia's top 7 franchisees

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If you’re fed up with the rigours of working for someone else, signing up for a franchise may be the answer. Jackie Pearson has all the details to take you from eyeing to buying.  

Boss getting on your nerves? Is the nine-to-five rat-race not for you? Need a change? Are you interested in small business but prefer the backing of a larger organisation?

If the answer to any of these questions is “yes” and you fancy yourself as a budding entrepreneur, franchising could be your ticket to success.

According to the Franchise Council of Australia (FCA), franchisee failure rates are low. In its Franchising Australia 2006 survey, fewer than 2 per cent of franchise businesses ceased to operate during 2005 and 91 per cent didn’t change ownership.

“Of the remainder, most changes occurred when franchisees sold their businesses to new franchisees or the franchisor,” the survey reports.

FCA chief executive Richard Evans says: “Franchise systems account for only 5 per cent of all small businesses in Australia. But they’re currently creating 50 per cent of small business GDP [gross domestic product].”

Evans says the sector continues to achieve an overall growth rate above 14 per cent a year, which is “healthy when compared with other sectors”.

“Owning a franchise is like being in business for yourself but not by yourself,” he says. “You have the support of the system that’s been put in place by the franchisor and of the other franchisees but there’s no guarantee of success. It’s still as hard as starting any other business. There’s just a little less risk.”  

But before you jump in, there are some tough decisions to make. There are more than 900 franchising businesses to choose from in Australia and picking the right one is crucial.

While some will open the door for you to achieve your career ambitions, and possibly even your lifestyle goals, others could lead to heartache and financial disaster.

But how do you sift through the hundreds of opportunities on offer to arrive at your ideal franchise? AFR Smart Investor has taken some of the hard work out of it.

After conducting extensive analysis, we’ve identified the top seven franchise options.

Our research clearly shows that initial and ongoing costs, returns on investment, structures and support can vary substantially from one franchising operation to another.

You’ll need to compare all these factors if you want to make the right decision and become a happy franchisee – just like Michael and Genevieve Nicholas.

The couple operates two Coffee Club franchises in Sydney and has plans to expand into more stores. “We looked at franchises as opposed to other types of business because we thoroughly believe that when people go out to look for a product or service they look for a brand name,” Michael says.

Genevieve and Michael considered a whole range of franchises before they decided the Coffee Club was best for them. It took them 18 months to finally sign on the dotted line. During that time they spoke with other franchisees and took considerable advice from their accountants.

“Not all the [franchises] we looked at were willing to be open about financial details and the return on investment we could expect and that worried me,” Michael says.

Michael and Genevieve’s approach and experiences as franchisees are ideal, but their success had nothing to do with good luck.

They did their homework and were prepared to put in the hard work that is essential with any business venture. Ready to give it a go? Here are our tips on how you can do the same.

Is franchising right for you?
Rule No.1 is that franchising is not the right option for everybody.

“Just because you like the taste of a burger or the look of a shop doesn’t mean that’s the sort of business you should operate,” FCA’s Evans says. “You need to do some due diligence on yourself first to work out whether you’re cut out for franchising.

“The [businesses] available are very specific and you’ll be required to meet the standards and expectations of the system that’s in place.

“If you want to bend the rules, perhaps you shouldn’t be in franchising.” Evans says a good understanding of what it takes to run a business is also vital before you commit to a franchise.

“Before you even start looking at the different franchise systems available, get some small business training and then do some research on the type of small business you want,” he says.  

What type of business?
Not all franchises are high-profile fast-food outlets. In fact, the most common types of franchises are non-food retail outlets and property and business services operations. One of the early decisions would-be franchisees need to make is what market they want to be in.

Do you want to supply goods and services to other businesses or to consumers? How much competition is there in the markets you’re considering?

Once you’ve researched different markets, it’s time to start comparing franchisors.

“Take your time,” Evans says. “Everyone likes sexy, high-profile systems, but there are franchises out there that clean rubbish bins that generate high-gross profits.

“You also need to look at whether the product or service is sustainable in the market. It needs brand penetration and a good system, like Baker’s Delight as opposed to a little-known urban burger system.”

How much should you pay?
Prices vary substantially for different franchises. You can pay less than $20,000 for some and more than $1 million for others. But there’s more to consider than the initial capital investment.

Where franchisors really make their money is out of royalties or franchise service fees. These can be a flat monthly fee or a fee based on a percentage of your gross or net income. To get an accurate impression of the relative size of a franchise’s fees, you should compare the charges to the business’s annual turnover.

Franchisors with expected annual turnovers greater than $50,000 must supply disclosure documents under the Franchising Code of Conduct that is enforced by the Australian Competition and Consumer Commission (ACCC).

Some franchisors also have ongoing marketing fees, which can be levied as a fl at rate or on a percentage basis. Others charge for training. Above all, you should ensure the costs required to take on the franchise produce a suitable return.

“The bottom line is that you have to look at your earnings before interest and tax in comparison with the gross returns that would be available from other investments,” Evans says. “At the moment you should be earning at least 14 per cent from a franchise or you should be looking to invest your money elsewhere.”

What support should you get?
Fees and charges are not necessarily a burden on your business. Happy franchisees consider ongoing royalties and fees as part of their investment in the business.

That’s why it’s essential to talk to other franchisees before you join. Names and contact numbers should be provided by the franchisor. Alarm bells should ring if any franchisor is reluctant to put you in touch with existing franchisees. The types of support we looked for when assessing the franchises in our survey included comprehensive training and business planning – both initial and ongoing – mentoring, technical support and assistance with recruitment and training of staff.

Also make sure the franchisor can help you negotiate good deals with your suppliers. You certainly shouldn’t be paying more than normal wholesale prices for supplies. The payments you make to be part of a franchise system should also ensure that product names are trademarked or that services have a strong and recognisable trade name.

The downside
Like most purchases, acquiring a franchise comes with a warning: buyer beware. Bogus operators are out there, ready to swindle you out of your money and your dream of owning your own business.

The franchise industry operates under the mandatory Franchising Code of Conduct, which was introduced in 1998. But ACCC commissioner John Martin says not everybody complies.

“Our main issue has been at the scam or rogue end of the market,” Martin says. “There are always going to be people who take money from potential franchisees and promise to set up [franchises] that never eventuate. Then there’s another group of people, some of whom may look mainstream, who don’t do proper disclosure under the code.”

Martin says you need to be wary of business propositions offered on a distributor or agency basis as a way of getting around the requirements of the code.

“If it sounds like a franchise and looks like a franchise then it should be operating under the terms of the code of conduct.” He says the ACCC is now monitoring business expos and the business opportunities sections of newspaper classifieds to detect bogus franchise offers before people get burned.

“All good franchising systems should have consultative groups and internal dispute resolution systems,” he says.

Martin says the ACCC receives 800 to 1000 complaints and inquiries about franchises every year. “We are always having particular [franchise] systems under investigation and some areas are grey,” he says.

“There may not be a direct breach of the code or the Trade Practices Act but problems with the franchise structure.”

Our verdict
There are some excellent franchising opportunities that provide genuine prospects for new recruits, but there are also some dogs. It is essential to do plenty of due diligence and get good, independent advice before you make a decision.

As a first step, make sure you know your own skills, strengths and lifestyle needs before you start to look at franchising opportunities.

The next step is to research markets and finally scrutinise a number of franchisors before making a decision. None of this should be done in a hurry, no matter how good an opportunity seems at the time.

The mandatory franchising code of conduct also makes it a requirement that you get independent legal or financial advice, and we suggest you get both.

The bottom line is that franchising is like any other business opportunity. There is a risk you could lose your money so don’t start a business with money you can’t do without.     

Snap-on Tools
Minimum initial capital investment (including GST):
$188,000
Business type: Mobile tool service
No. of current franchise units: 154
No. of new franchise units available: 26
Year business established: 1988
Year franchising began: 1997
Is the product trademarked?: Yes
Ongoing royalty or franchise fee (percentage of annual turnover, or $): $390 per month
Marketing cost (percentage of annual turnover, or $): None
Training fee (upfront, unless specified): Not supplied (part of start-up costs)
Do franchisees pay for supply of goods or services at above wholesale prices?: No  
Term of franchising agreement: 6 years
Renewal options: Further 6 years
Training for new franchisees: Six days at training centre in Dallas, Texas plus two days at national centre in Sydney plus three weeks training with sales manager
Ongoing training: Yes
Average annual turnover of established franchisees: $400,000
Annual turnover range for established franchisees: $255,00 - $2 million
Exclusive business territories: Yes
Franchise Council of Australia member?: Yes

This article appears courtesy of Smart Investor magazine.

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