Do you know that the franchising industry in Australia is estimated to reach $169.5bn by the end of 2023?
Needless to say, franchising a business is becoming more and more common in Australia. However, common does not mean that the process has become simpler.
Whether you are a franchisee or a franchisor, you shall meet a long list of requirements to start a franchise. One of those requirements is selecting a franchising model.
Two of the most popular franchising models are traditional franchising or joint ventures or partnerships. Both of these models have their unique set of pros and cons that can impact your business.
Today’s post highlights those pros and cons to help you choose the correct franchising model for your business.
So, continue reading!
Franchising A Business: The Pros And Cons Of Joint Venture Franchising And Traditional Franchising
While franchising is an excellent way to grow your business, choosing the wrong model can negatively affect your revenue.
Hence, before making any decision, it’s essential to learn the differences.
Franchising A Business Following The Traditional Model
Traditional franchising is the model that most franchisors prefer. In this model, a franchisor and a franchisee enter into a franchise agreement, allowing the franchisee to use the intellectual property of the franchisor to run the franchised business.
The franchisee can run the business independently without constant interference from the franchisor.
Here are the pros and cons of this franchising model.
Pros
i) If you are franchising a business as a franchisor, following the traditional model will reduce your liability and risks. The franchisee will be operating the business and be liable for losses.
ii) The arrangement between the franchisor and the franchisee will depend on the franchise agreement and other relevant documents and will not be governed by the Corporations Act 2001.
iii) Franchisors will leverage the growing network of several franchisees.
iv) The franchisor and the franchisee will have separate tax planning.
Cons
i) Franchisees may face limitations when growing their franchise network unless the franchisor offers support.
ii) These financial barriers often also limit a franchisor’s ability to find talented franchisees.
iii) Franchisors will have to rely on the franchise agreement to practice their right since they will not have much control over the franchise.
Franchising A Business Following The Joint Venture Model
The joint venture or partnership model of franchising a business is comparatively more complicated. Here, the franchise is a company that will hold shares in the franchisor's business.
In this case, both parties have to sign a franchise agreement as well as a joint venture agreement. The latter will highlight how the two parties will divide tasks and responsibilities.
Furthermore, joint venture agreements nominate a single party to establish the franchise agreement. This party is known as the operative shareholder.
Pros
i) While franchisees have less control, they still have ownership rights in the business.
ii) Franchisors can enjoy limited liability by creating separate legal entities to transfer shares.
iii) This model offers more flexibility to both parties for contributing capital and receiving equity.
iv) Franchisors enjoy additional controls over the operation of the franchises.
Cons
i) The additional franchisor control can lead to proprietary company issues.
ii) The Corporations Act 2001 will govern the relationship between the franchisor and the franchisee.
iii) Based on the chosen representative, franchisors may have to abide by additional Corporations Act 2001 laws.
iv) You will need to create more documentation when following this model.
v) If a party decides to exit the contract, it can be way more complicated than the traditional method.
vi) You might require additional legal help to understand the documentation and legal needs, increasing the cost.
vii) Administrative and taxation duties can get more complicated, especially for the franchisor.
Bottom Line
When franchising a business in Australia, it’s essential to learn about different models and how they can impact your business processes. The above comparison shows that the traditional model offers less control to franchisors, but it’s much more straightforward. The joint-venture model offers additional control to franchisors. However, the agreements will be governed by the Corporations Act 2001.
Hopefully, these points will help you pick the franchising model best for your business.
Opening a franchise needs a substantial investment of capital which includes a hefty franchise fee along with continuing payments and marketing expenses. Every individual does not have access to that kind of cash says, Sean Michael Malatesta.
Are you looking to invest in a franchise? If yes, then you are at right place. Actually, finding the corporate loan to fund your franchise asset is challenging as you have to navigate the numerous options available. In this article, you will get the information how you can finance the purchase for a new franchise.
Let’s have a look:
Franchisor financing:
If you want to invest in a franchise, your conversation should be direct with the franchisors. You should ask them for recommendations. Actually, they can have the contract with lenders in order to approve a loan. In fact, they can also help in shortening the process and help you open sooner.
Also, some franchisors will endow debt financing themselves. You can check this in the franchise disclosure document. Ask the franchisor if they can help in financing. Lessening the upfront cost will leave you more dough to keep your franchise profitable and developing.
SBA loans:
Another option to consider while financing a franchise is Small Business Administration’s Loan program. These loans follow the similar model to old-style term loans from a bank or alternate lender.
SBA has reduced the risk to lenders by assuring a portion of the loan amount with lower interest rates and longer repayment terms. Hence, if you have a good credit score to apply for the loan, then you should certainly apply for the loan. However, keep in mind that prerequisite standards can be strict as well as the application process is long.
Commercial bank loans:
One more way to finance the purchase of your franchise is to apply for traditional term loan from a bank. Under this model, a bank or lender provide your lump sum of cash up front which you have to repay in monthly instalments over a specific period of time emphasis Sean Michael Malatesta.
While applying for the commercial loan to buy a franchise, the lender will review your corporate plan and credit history. Actually, the lender uses these documents to evaluate your creditworthiness. You can assume that the stronger your credit history, better the terms and interest rate for your term loan to finance a franchise.
Crowdfunding:
If no franchise financing option is available then obtaining finance may require some creativity. One of the latest and creative ways of financing franchise is through crowdfunding.
You have to set up and promote your own crowdfunding page. Moreover, you can look toward particular organizations that crowdfund for businesses and franchises. There are a lot of websites that crowdfund for specific industries and business types. Crowdfunding is the best option if you have a bad credit history and you are not satisfied with the loan products and interest rates for which you qualify.
Wrapping Up
Sean Michael Malatesta – A corporate leader has given the above franchise financing options to the entrepreneurs. With all these funding options, select a path that is right for you as well as your corporate. Be careful, thorough and resourceful with the funding plan and your franchise investment will definitely flourish.
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