Buying a franchise can be a successful way to enter the business world, particularly if you lack business skills. But there are traps and pitfalls for franchisees.
For one thing, there is an imbalance of power. The franchisor will often hold the head lease of the business premises. Also the franchisor will probably hold the telephone number. If the franchisee falls out with the franchisor he may find his lease terminated and the phones cut off.
A number of franchisors have struck trouble in recent years, leaving the franchisees stranded.
If you are considering purchasing a franchise, a good piece of advice is to contact at least three franchisees in the chain and ask their opinion of the franchisor and the franchise system. This could be very revealing.
The following is an excerpt from a 2019 report from Monash University:
According to the 2016 Franchising Taskforce Issues Paper, there were more than 1300 franchisors operating in Australia and around 97,000 franchisees. These franchisees are predominately small and family businesses.
The franchises have a sales turnover of $182 billion (including motor vehicle and fuel retail sales) and the sector employs more than 500,000 people. Ninety per cent of these franchise brands originated in Australia, as per the Franchising in Australia report 2016.
Today, the website Franchisebusiness lists more than 180-250 different franchise brands with franchising opportunities in Australia.
There’s considerable evidence to suggest that franchises are more successful than independent businesses. A successful franchise has benefited many independent entrepreneurs with a tried and tested business model. This is true for both global and Australian brands that have built extensive franchise networks. A franchise brand that customers love, along with a healthy relationship between the franchisor and their franchisees, can be a recipe for great success.
When franchisees sign up for the franchisor’s business model, they do so to reduce the business risk of managing an independent business. However, in doing so the franchisees add franchise risk. Franchisees count on the franchisors to grow and protect the brand. The franchisors rely on the franchisees to deliver on the brand promise. This creates the need for a symbiotic relationship between the franchisor and the franchisee that benefits both parties.
Things can go wrong
In the past few years, the franchise model in Australia has been going through significant challenges, mainly because of worker underpayments, abuse of power by franchisors, lack of power of franchisees, unprofitable franchisees, unfair and one-sided franchise contracts, and franchisor misrepresentation in the franchise disclosure documents.
The parliamentary committee examining the franchising sector released the Fairness in Franchising report in March 2019. This report was a comprehensive examination of franchising in Australia.
The committee received more than 400 submissions, of which more than 80 per cent were from franchisees. Of the 300-plus submissions from franchisees, more than “40 per cent of submissions related to Retail Food Group (RFG), Foodco, Domino’s, and Caltex. Five additional franchise systems identified by the franchisees were: Cold Rock ice-cream, 7-Eleven, Autobarm, Craveable Brands, and Pizza Hut”.
Almost 65 per cent of the franchisee complaints were on 10 franchise brands in Australia.
In spite of 300-plus franchisee submissions, more than half were confidential, as the franchisees feared retaliation from the franchisor.
One crucial issue franchisees identified was that franchisors made significant and frequent changes to the business model.