Operating your franchise

Now that your franchise is up and running, you can breathe a sigh of relief that the hard part of securing your franchise and signing the agreement is over. But that doesn't mean you can set your franchise on auto-pilot. Like most businesses, franchises may take a while to begin generating profit, but you can keep your head above water during that critical first year by avoiding some common pitfalls:

Here are some problems you may face and the best way to overcome or avoid them:

  • Franchisor-franchisee conflict
  • Marketing traps
  • Cash flow problems

Franchisor-franchisee conflict

There are bound to be moments when you don't see eye to eye with your franchisor, particularly regarding the management of the business itself. After all, being on the same team is no guarantee of harmony.

Griffith University recently published a research paper on franchise conflict, which revealed that 18% of franchisees felt their franchisor had not provided them with satisfactory information; and 28% felt unable to trust their franchisor. 36% of franchisees surveyed did not feel that there was prompt and timely communication to conflict resolution with their franchisor. Although these numbers are firmly in the minority, they reflect a large potential for conflict.

Common problems can include the untimely payment of franchise fees, a lack of support or any breach of contract. It is important that both parties have a dispute resolution process in place in order to provide a quick and cost-efficient procedure to settle any commercial dispute. This should be part of the franchise agreement as it is legally binding over both parties.

According to the Australian Competition and Consumer Commission, a dispute resolution process should also aim to maintain a good working relationship between the franchisor and franchisee.

Once a point of concern is identified, the first step is to inform the other party (in this case, the franchisor) of your complaint in writing. There are three parts to this letter: the type of dispute, what outcome you hope to see and what action the franchisor should take to resolve the problem. If the dispute cannot be resolved in three weeks, you should take the matter to a Mediation Adviser.

One mistake not to make is to act rashly or violently before bringing it to the attention of a mediator. The recent destruction of a Sumo Salad franchise in Sydney Central Plaza by its franchisor is evidence that hard actions do not solve anything. Luke Baylis, the managing director of Sumo Salad, said that franchisee Issac Chalik was "in multiple breach" of the franchise agreement due to health and food safety violations. As a result, the furniture and equipment at Chalik's store was cut into pieces and dismantled, with the store boarded up and locked.

In order to avoid such extreme scenarios, you should follow the dispute resolution process outlined by the ACCC in the franchise code of conduct compliance manual. Another alternative to mediation is taking private legal action against the other party, although you should be aware of legal costs and the complexities that it involves.

Marketing traps

A new business can attract a number of marketing offers, particularly from local newspapers and internet advertisers. However, it is very likely that your franchisor already has a marketing plan it wants all franchisees to follow, a clause that was most likely outlined in the franchise agreement from the outset.

Part of operating a franchise is having the advantage of an established brand, but this also means that you are legally bound to certain conventions, such as specific trading hours, trademarks and pricing requirements. It would be in breach of the franchise agreement to price your products at any level you deem fit, for example, charging eight dollars for a cup of Gloria Jeans coffee when the standardised price is around four dollars. This would not only lead to customer complaints, but also elicit bad press for the franchisor.

Any new marketing or publicity ideas you have is best taken up with your franchisor in a meeting, rather than implementing these measures on your own.

Cash flow problems

Finance and cash flow problems are among the most common faced by franchisees, particularly in their first year of operation. You should be aware of how much you have to pay before entering into a franchise agreement, such as the initial franchise fee, royalties and advertising fees.

Don't forget to factor in the cost of fitting out your new store, which can include equipment, uniform and vehicle costs. According to franchise consultancy firm DC Strategy, establishment costs can range anywhere from $20,000 to more than $500,000. Generally, food retail businesses cost more to start-up as compared to non-food businesses.

You should also keep in mind rental costs, which can be expensive if your store is located in a high foot traffic area or in the CBD. A good way to save money from the outset is to negotiate the lowest possible rent with your landlord. Perhaps he or she may give you the first few months free or at a low rate. Or, instead of taking over a new franchise location, think about buying over an existing company-owned store, which will likely be sold to you at a lower rate.

Although there are various costs and problems uniquely associated with being a franchise, knowing what to watch out for can reduce their impact on your business.

Connect with us to receive updates throughout the day:

Like us on Facebok Follow us on Twitter

Dun and Bradstreet AustraliaTop of page Dun & Bradstreet Australia Pty Ltd 2015 | D&B Small Business    *About Us    *Sitemap    *Advertise    *Privacy    *Terms & Conditions