How to Start a Franchise Business

how to start a franchise business

Did you know that two out of every 15 business plans we write is for a franchise business? In fact, many of our clients approach us when investigating this avenue for the very first time. There are numerous advantages to being your own boss, along with a few drawbacks. However, the primary focus of this blog is to guide you through the initial stages with efficiency. Our goal is to assist you in strategising for profitability, ensuring a steady cash flow, building a devoted customer following, discovering excellent employees and suppliers, as well as optimising your online and offline presence.

Before Getting Started

  1. Get your business plan sorted – don’t plan to fail, or fail to plan
    Many small franchise businesses areskeptical or even indifferent towards the idea of a business plan. This skepticism is understandable for those who have previously operated a successful business, however, for those without such experience, engaging in some level of business planning is absolutely crucial – even if it doesn’t result in a formal document.

    Your business plan should encompass the following elements from a franchise standpoint: firstly, conduct an analysis of the business environment (which may involve examining local neighborhoods if it’s a retail business catering to specific consumers). It’s important to consider your competitors as part of the overall environment.

    Once the environmental scan and competitor analysis are complete, identify the strengths and weaknesses of your franchise. These factors are only meaningful in relation to those of your competitors.

    Next, identify external opportunities and threats within your environment. If your franchise operates in an area or category with no competitors, for example, it presents an opportunity. A multitude of competitors, or adverse industry or market trends, on the other hand, represent potential threats.

    Proceed to develop your marketing plan (more details on this will follow) and your operational plan (also discussed later). Additionally, establish clear objectives, milestones, and goals to provide a sense of direction and achievement.

    At this stage, you may question whether a mission and vision are necessary. While not obligatory, there is no harm in embracing these elements if they resonate with your chosen franchise and its values.

If you’d like to learn how to write a quick franchise business plan, click here: https://www.smallbusinessplans.com.au/how-to-write-a-quick-business-plan/   

  • Get your financials sorted
    Many clients often overlook the importance ofdetermining their legal structure and instead focus solely on what they will sell or how they will produce their product or service. While understandable, this approach is not wise.

    But why does it matter? Well, in the unfortunate event that your franchise business fails or if another crisis like a pandemic occurs, you could find yourself personally liable for the debts your business has incurred. As a sole trader, your personal assets (such as your house, car, and other belongings), can be targeted by banks and creditors to recover the money owed. The Tax Office even has the authority to withdraw funds directly from your bank account if they need to. If you establish your franchise as a Company, however, you are shielded from personal liability, as a Company is considered a distinct legal entity.

    It’s crucial that you make an upfront decision regarding whether you will operate as a Company or a sole trader. There are additional considerations, including tax implications and other complexities, that you should be aware of.

Consider how you’ll market yourself

  • Get your franchise seen
    Branding is a crucial aspect of your franchise business and achieving consistency across the board will be one of your franchisor’s main concerns. Every single store, no matter where it is located, must look as similar as possible. As a part of your licensing fee, you are purchasing the rights to everything that makes up the brand visually (including the messages, imagery, logos, colours, and even the typography).

    You are generally not permitted to change the franchise’s branding in any way, although some do allow for location or franchisee name to be added. You will receive a brand guide that details exactly how all the visual elements are to be used, and you must follow this to the letter.
  • Get your marketing plan sorted – yes, this is important, too
    It’s crucial to include a concise marketing plan within your overall franchise business plan – consider it a focused segment dedicated to your marketing efforts. When time permits, however, it’s a good idea to create a more detailed standalone marketing document. Some aspects of the plan will come from the franchisor, whereas others will be specific to your particular location.

    Your marketing plan should clearly define your target market, understanding their needs, preferences, and demographics. Next, conduct a thorough analysis of your competitors, delving deeper into their strategies, strengths, and weaknesses. Set specific targets for your marketing goals and break them down into manageable and achievable milestones.

    Develop effective strategies that will help you reach your targets, employing various channels and tactics to attract customers to your business. It’s important to establish a measurement and evaluation framework on a monthly basis. This allows you to track your progress towards your goals and assess the effectiveness of your marketing efforts. You’ll gain insights into customer acquisition, website traffic, e-store browsing (if applicable), and customer inquiries.
  • Understand your online activities
    Online strategies play a vital role in the success of your business. Depending on the franchise, this may include creating a user-friendly website, implementing search engine optimisation, and using content to showcase your expertise and the quality of your products and services.

    It’s crucial to understand the various roles that platforms like YouTube, Facebook, Instagram, Google My Business, Pinterest, LinkedIn, and Twitter play in influencing customer choices between you and your competitors. It’s likely that your franchisor will also have some guidelines that you need to follow when posting on social media – if you’re even allowed to, as some franchises have a single universal account.

    If you sell a product or service that people need to learn a little bit about, that they might buy online, or that they want to read a little bit about and then contact you directly, then search engine optimisation (SEO) is a must. Keywords, links, AdWords, along with continuous measurement and evaluation are key components of effective SEO. Again, this is something that you only need to investigate if you’re allowed to setup your own website.

    Electronic direct mail remains an effective communication method when executed correctly, even in the presence of AdWords and Facebook advertising. If you’re required to organise this yourself, you can purchase mailing lists and directly email individuals or businesses in Australia at a fraction of the cost of an extensive advertising campaign. Consider leveraging both electronic direct mail and targeted advertising for maximum impact.

    Ensure that your products or services are on par with or better than your competitors. The franchisor will generally have conducted market research and sought feedback from unbiased individuals to ascertain the superiority of their offerings, however, they may ask franchisees to assist with this moving forward.

    Pricing is generally determined by the franchisor, however, sometimes this is left to the discretion of the franchisee. Research suggests that charging more than a 7% premium may exceed what customers are willing to pay.

    Visibility and availability extend beyond the internet and social media platforms. It is a common misconception among small franchise businesses that advertising alone is sufficient. If permitted, consider engaging in off-internet strategies to reach a wider audience. A juice bar located near multiple gyms, for example, could distribute free samples, along with special offer flyers or QR codes, to gym members. By combining this offline presence with online advertising, the juice bar can effectively reach a larger percentage of the gym audience. Replicating such activities at different times or days can help achieve near-complete coverage of gym members.

Your operations and services

  • Employing the right people
    The employment process requires both a job description and a person description. A job description outlines the specific responsibilities and tasks associated with the role, whilst a person description focuses on identifying the ideal qualities and characteristics of the individual who will ultimately fulfil the job requirements.

    Whilst we’d all love the perfect candidate to just come waltzing through the door, if people form a key part of your service and operation, leaving this up to chance is a really bad idea. If you have a staff member who deals with your customers in person, over the phone or even over email, for example, it’s essential that you define the desired values, approach, and style of that staff member. This alignment between the person description and the job description ensures a cohesive fit between the individual and the duties they are expected to fulfil.
  • Being a good employer
    You havea number of obligations to your employees. These include fair pay, superannuation, paying payroll tax to the government, prioritising their safety whilst at work, and providing them with an agreement that covers their role. In many industries, skill shortages have emerged, leading to the hiring of employees who may not fully meet the desired qualifications. To become an employer of choice, it is crucial to prioritise fair and timely payment, as well as treat employees with respect and consideration.

The money side of things

  • Get your bookkeeping and accounts sorted
    Establishing a cloud accounting system is highly recommended over relying on Excel for financial management. While Excel may be tempting due to familiarity, it lacks the convenience of preloaded formulas, calculations, up-to-date tax rates, and comprehensive charting features found in dedicated accounting software such as Xero, MYOB, or Quicken. It is essential to set up a proper financial system sooner rather than later.

    Create a systematic approach for tracking bills, receipts and invoices to effectively manage your finances- and don’t overlook petty cash.

    If feasible, obtain a company credit or debit card to separate personal and business finances. This ensures clarity and avoids any potential confusion or co-mingling of funds.
  • Starting off your books the right way
    A lot of new franchises spend their own money in getting set up anddon’t realise that they can put this as a tax deduction. They also don’t realise that you’re able to carry forward a loss. It doesn’t matter if the business isn’t making any money and you put in your own money – even if it’s just for something small like an Uber to scope out a potential location – you’re still creating a loss, and it can be deducted from your first lot of revenue.

    Another reason to start organising your financials straight away is the simplicity of doing so with only a small number of transactions. It’s much easier to get your head around a few receipts totalling $150 and a few sales totalling a few thousand dollars before the business grows and to you need to start tackling other types of expenses.
  • Consider start-up costs and expenses
    Begin by creating a comprehensive start-up budget that covers both your living expenses and all the necessary items for your franchise. If you’re opening a takeaway food store, for example, there are approximately 35 different types of products or services you’ll need to purchase before opening your doors. There are also things like mandatory training, that you have to pay for, to consider. Instead of immediately diving into procurement, it’s advisable to first make a list, seek advice, conduct research, and ensure you have everything required. This approach helps prevent budget overruns and ensures timely establishment of your new premises.

    Carefully evaluate your financing options, such as business loans, personal credit cards, or equipment leasing. Choose the right lender based on factors like loan terms, interest rates, and other relevant considerations.

    Look at Lodging a Successful Loan Application

    What to do if you get knocked back, and when to use a finance broker.
  • Reading and understanding “the big 3”
    Here, we’re talking about the profit and loss statement, balance sheet, and cash flow. Gaining a thorough understanding of how these reports work, conducting a sales forecast, and meticulously accounting for all your costs and expenses are essential steps. Costs fluctuate based on the quantity of goods or services sold, while expenses remain constant regardless. In an online franchise business, transaction fees to payment processors like Stripe or Square would be considered costs, while expenses are recurring items like employee wages or utility bills.
  • Calculating a margin
    Gross profit represents the amount you earn after covering the “costs.” In a takeaway food store, for example, once you’ve paid for bread, meat, packaging, and beverages, you’re left with your gross profit. Then, you deduct your “expenses”, which are things like salaries, internet costs, electricity, air conditioning, and so on.

    How do you know if you’ve got a good margin? Good news, the Australian Taxation Office has some samples for you and you can find these here – www.ato.gov.au/business/small-business-benchmarks/.

    Determining your break-even point and knowing when you’ve reached it involves a simple formula:

    Fixed Costs / (Average Sales Price – Variable Costs)

    This formula calculates the number of units or products you need to sell per month by considering your fixed costs, variable costs, and average price. Let’s look at an example:

    Fixed operating costs: $5,000 per month
    Variable expenses: $1,500 per month
    Average price: $2,500 per job/unit/product

    $5,000 / ($2,500 – $1,500) = 5 jobs/units/products per month

    By selling five units per month at $2,500 each, you will break even.
  • Keeping in good with the ATO
    Around 90% of businesses generate a turnover exceeding $75,000, necessitating their registration for GST. It’s crucial not to procrastinate on this matter since the government closely monitors those who fail to fulfil their tax obligations. Their reasoning is simple: if you’re making money, you are expected to pay the corresponding tax.

    Other aspects of your business are more variable and require a reliable bookkeeping system, as we mentioned earlier. This enables you to maximise your tax deductions – the more meticulous you are in recording details, the more you can potentially save. Ensure that both your bookkeeping system and your accountant are kept up to date, as this will ensure that you receive a clear understanding of your eligible deductions.

    It is equally important to maintain a clear distinction between personal and business expenses, avoiding any false claims for non-business-related costs.

    At this stage, it’s also vital to prepare for the payment of your quarterly or monthly BAS (Business Activity Statement) and payroll tax. This can help to avoid financial strain that many franchises face when they receive a substantial bill at the end of the quarter.

Watchouts for Franchise Business Owners

  1. Have you got all the bases we’ve discussed above covered? If not, prioritise your weakest areas from the list above and start with those.
  2. Forgetting to consider royalties
    Many people forget that there are ongoing royalty payments associated with franchise businesses beyond the initial setup costs. These payments vary depending on the industry and the franchisor, but they are typically around the 5-6% mark. Royalties can make a big difference to your bottom line as a franchisee, especially if you’re operating within a business model that already has thin margins.
  3. Strict rules and contractual obligations
    You may have wanted to be your own boss, but when you become afranchisee you need to abide by the rules set by the franchisor, whether you agree with them or not. There may also be certain contractual obligations that you’re expected to meet, such as the need to spend a lot of capital on updating the store. Remember that franchise agreements are written by the franchisor’s lawyers, so they serve to protect the franchisor more than the franchisee. Breaking your obligations can result in your franchise licence being revoked.
  4. Issues with reselling
    If you decided to sell the business at some point in the future, the franchisor has the right to veto the sale. Some agreements require franchisees to sell the franchise through head office, as well as pay additional fees. This can make it extremely difficult to sell the business and to capitalise on any value that you added during your ownership of it.

If you want to start a franchise business and want some help getting your business plan sorted, get in touch with us on 1300 644853 or at info@smallbusinessplans.com.au (24/7 website chat and enquiry available).  

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