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FRANCHISING PART 1: THINKING OF PURCHASING A FRANCHISE?

In this two-part feature, Philip Ciniglio from Market Minds looks at both sides of the coin when becoming involved in a franchise business. Here, part one looks at the considerations of purchasing a franchise.

Franchising is not an industry; it is a sector or a channel of distribution that was designed to assist people engaging in a small business, riding on the back of an already proven and successful model, using the benefits of a brand name, its systems and marketing. Put simply, a franchisor is the creator of the formatted business system, and a franchisee is a person/s that buys into that system under a contract or Franchise Agreement.

Whilst franchising in Australia had gained some bad press during the early years of the 70s, 80s and 90s, it has now come of age. The success of franchising in Australia over the past 20 years speaks for itself, and the introduction of a Franchise Code of Conduct by the government in 1998 has helped improve things greatly.

 

The Franchise Code of Conduct

One of the main reasons for the success of franchising in Australia has been the introduction of a mandatory code of conduct set out by the government in 1998. This code of conduct applies to all franchising throughout Australia and works in conjunction with the Trade Practices Act.

The managing body for this code of conduct is the ACCC (Australian Competition and Consumer Commission). The code of conduct provides for a cooling off period in the purchase of franchises and the provision by franchisors for full disclosure of the franchise company.

 

Several pest control companies already embark on franchising, as a channel to market distribution. Franchising is not for everyone, whether you are thinking of creating a new franchise brand or buying in as a franchisee. In this two-part article I will provide an outline of the benefits and potential pitfalls of entering into a franchise.

If you are considering the option of becoming your own boss and possibly investing in a franchise business then you will probably be at a crossroads in your life and looking to make critical decisions for the future. You may currently be an employee in the pest control industry thinking of buying your own small business as a franchisee or you may be from outside the industry looking for a hands-on small business to invest in. Either way the factors to be considered are just the same.

There are undoubtedly many benefits to owning a business franchise rather than being independent. These benefits create a safety net and lower risk of failure, such as taking on a proven brand name and its reputation, alongside a proven product or service. In terms of operations, there is a reduced cost of national and regional advertising and group purchasing benefits. Adopting established business methods saves many years of trial and error, and ongoing product research and development keeps the business on point. From the very start of the franchise business, the franchisor will be on hand to offer start-up training and assistance with the launch.

Of course, with these benefits come risk. Being in business for yourself and going it alone takes courage. Starting any new business involves a deal of risk and there has to be some assurance that making the switch to becoming a business owner will fulfil the needs for personal growth that may be lacking in your present situation. It’s vital to look ahead and assess if this is the right option for meeting the needs of yourself and current/future family in the long term.

Consider a few key questions. Do you want to use familiar skills or try something totally new? Will your family support you, especially if things are challenging to begin with? How will you finance the franchise? If after discussion and thought, buying a franchise seems to be a sound option, then things can progress to engaging with the franchisor in mind.

When speaking with the franchisor, they should be willing to provide several key pieces of information, such as explaining the nature of the competitive advantage the business offers over competitors and how the advertising and marketing support for the brand is managed. When it comes to financials, three figures to clarify are the upfront fee, the total ongoing fees, and the total investment. Having the support of the franchisor is vital for success, which should include initial (and ongoing) training and up to date operations manuals.

If it seems to be the right path then it is time to check out the fine print. This means being across the details around the length of tenure and renewals, the conditions for terminating the agreement and whether the agreement is exclusive or non-exclusive. Ultimately it means having full transparency about the obligations of both parties.

With such a serious amount of documentation to work through, it goes without saying that any prospective franchisee should obtain professional advice. Not only independent legal advice, but accounting and business advice too. Speaking with existing franchisees offers excellent insight into what it is like to actually run such a franchise operation. Ask about their level of satisfaction with the support they receive and the pros and cons of the lifestyle.

Franchising is not a guarantee of success but finding the right company and style of business that suits you can be a better choice than going it alone. Joining a franchise concept can provide you with the support, training, marketing and systems to help you run a successful franchised business, however, it will still be your own business and the ultimate success will depend upon you to make it happen.

Small business failure in Australia is no different to the rest of the world; approximately 80% of standalone small businesses will fail within the first five years. This is compared to the purchase of a franchised business, where approximately 80% will be successful. This is a staggering figure, and you would have to ask yourself why anyone would take that sort of a gamble and start up their own independent business. You are far safer purchasing a franchised business.

However, only an extremely well organised and thought through business system and business model will work. Remember, companies that start up a new franchise system are in that 80% failure rate in the first five years. So, teaming up with a brand that has established itself over several years is extremely important.

The Franchise Code of Conduct means that if you should end up in a dispute with the franchise company then you have a right to mandatory mediation; a far less costly experience for resolving a dispute. Most disputes are successfully resolved through mediation.

Take your time and seek advice!

 

Philip Ciniglio, Managing Director, Market Minds

 

Next issue will feature part two of this article, ‘Thinking of Starting a Franchise Company?’