Business franchising can be good, but is it all good?

As a method of getting a foothold into starting, owning and running a business, business format franchising is a well regarded and popular method.  Indeed, on a per capita basis, Australia is said to be the “franchise capital of the world”, even more so than the USA.

There are plenty of good-news stories and guides about the advantages of business format franchising.  A timely article in today’s Sydney Morning Herald, however, highlights what many consider an often neglected downside, for franchisees, in many franchising systems.  Even after allowing for any rights to renew for additional terms, most franchise agreements have a final end date, be it 5, 10 years or even 20 years from the start date, for example.

 

Once the franchise term is at an end, typically there is no right for the franchisee to obtain a new agreement from the franchisor.  Or as the article puts it, if you’re at the end of your franchising contract, the franchisor can do whatever it wants.

Unlike typical non-franchise businesses, towards the end of the franchise contract, the franchisee can find themselves with no rights, no asset... you have nothing at all; there’s no goodwill, there’s nothing.  You pick up your kit bag and go home. 

Metaphorically, and possibly quite literally, once you lock the doors for the last time, the keys are just simply handed back to the franchisor.  No reward, no payment and no return for the goodwill that was probably built up over years of hard work.

On the other hand, if one has an independant, non-connected and successful small business enterprise, the owner usually has a valuable asset to sell; the years’ worth of built up goodwill adding value and hopefully providing a decent return when the business is sold.

It’s not all bad.  If you’re thinking about starting or buying a franchise business, it's vitally important you just need to be aware of these sort of issues.  As always, make an informed decision after obtaining professional advice, particularly from your accountant and your solicitor.