Lending to the franchise sector – what you need to know

Australia is one of the most heavily franchised countries in the world (per capita). The franchise sector facilitates employment and business growth across several key industries, the largest of which is retail (27 percent).

However, in recent years the game has changed.

Growth of franchising has slowed and recent changes in the law have left franchisors open to be potentially liable for the conduct of their franchisees.

Our publication explores the current dynamics of the franchise sector in Australia, explains how typical franchisor/franchisee relationships work and outlines the risks and challenges of lending to franchisors/franchisees.

What do you need to know?

  • The health of a franchise network is a direct reflection of the financial health of its franchisee members. Falling prices and rising operating costs are making it more difficult for franchises to stay competitive and cover their fixed cost structure including franchisor royalties/commissions. 
  • Online retail – since 2008, the continued growth of online retail has given consumers access to more choice than ever and has allowed brands to sell direct to customers, sometimes eliminating the need for intermediaries and stores. Further, e-commerce has allowed franchisors to sell direct to customers, potentially cannibalising sales of their own franchise network.
  • The Uber effect – the rise of service based platforms such as Uber, Foodora and Airtasker have created an alternative to franchising by eliminating the need for would-be entrepreneurs to sign up to capital-intensive franchise models. Now they can simply download an app and become their own boss, set their own work hours and grow their own customer base with minimal upfront investment.
  • Compliance issues – a spotlight has been placed on the franchise sector by regulators including the Fair Work Ombudsman and the ACCC as a result of recent high profile workplace breaches. Changes to the Fair Work Act from November 2017 will make holding companies and franchisors potentially liable for contraventions of the Act by franchisees and subsidiaries.

To read more about the key issues around recruitment, access to finance, technology and compliance looking to the risks and challenges, business structures and lending considerations read our publication here.

Franchise front cover

 

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