It can be a seductive idea. Rather than starting a hospitality business from scratch, why not skip the start-up stage altogether by buying into a franchise?

And it’s a business model with a long illustrious history. Albert Singer developed the first franchise contract to help him sell more sewing machines more than 160 years ago. However, franchising’s most famous son is Ray Kroc – the milkshake machine salesman who transformed McDonald’s into the global behemoth it is today.

Many Australian entrepreneurs have used franchising to get into the hospitality business. Our country has more franchise outlets per capita than any other nation, including three times as many as the US.

That’s not to say the model doesn’t have flaws. You should weigh these up against franchising benefits if you’re deciding whether to take the leap or not.

What are the pros of buying a franchise? 

  • A business in a box

You don’t have to reinvent the wheel when you buy a franchise, as all the hard work in developing and testing products, business systems and processes has been done.

  • Brand recognition

When you buy a franchise, you’re getting access to an established name that’s likely instantly recognisable to many Australians.

  • Training

Franchisors want their franchisees to do well. So they usually provide the training you’ll need to get up to speed on the intricacies of the business’ operations. The support won’t stop there, as you can tap into the skills and knowledge in the wider franchise network.

  • Marketing support

You might be a small business owner. However, you have the backing of a big business with a bank account to match. Some of that cash will likely go on nationwide marketing campaigns, bringing more people into your store. That said, that boost won’t come free – as many franchisors require you to pay into a central marketing fund.

What are the cons of buying a franchise?

  • High start-up costs

A big name usually comes with a big financial investment – upwards of $1 million of unencumbered funds for some hospitality brands.

  • High ongoing costs

The bills don’t stop there. You’ll have to pay a percentage of your profit or turnover to the franchisor. These payments can hit your bottom line hard, particularly in hospitality sectors known for their razor-thin margins.

  • Strict rules

Part of the joy of being a small business owner is you get to call the shots … except when you are a franchisee. These rules can cover everything from the look and feel of your premises to how many tomatoes go into a bun. Break them at your peril, even if your new way of doing things is more efficient. 

  • One-sided contracts

Franchising in Australia is regulated by the Franchising Code of Conduct (FCC). While the FCC protects your rights, that doesn’t mean you won’t be signing a one-sided contract. For example, you might be forced to spend money updating your premises, or discover the franchisor can veto a sale if you want to sell the business.

Remember, buying into a franchise is no guarantee of success, even if it’s a McDonalds in a great location. You still need to put in the hard work, make informed decisions and manage your staff well. It’s also a good idea to do your legal due diligence before you sign a franchise contract.

Blaine Hattie is a hospitality lawyer at Sutton Laurence King Lawyers.

Want to buy a hospitality business? Get the legal advice you need by working with Sutton Laurence King. Call us on 03 9070 9810 or fill out this online form.