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The good, bad & ugly of shed franchises: Part 2: the BAD

In this three-part series, we help you delve deep into the question of: is buying into a shed franchise right for you? We do this by taking a look at all facets of shed franchises in Australia, the good, the bad and the ugly. 

 

If you missed part one, you can check it out here: Should you buy into a shed franchise? The GBU of shed franchises: Part 1. As you would have guessed from the title, part one looks at the good parts of shed franchises in Australia. It also covers some of the basics you need to know if you’re new to franchises, or are considering taking on a shed franchise in Australia.

 

Here, in part two, we take a look at the bad parts of franchising in the Australian shed industry.

 

First though, let’s take a quick look at an important preface:

Not all franchises systems are created equal

In a general sense, outside of the world of sheds, we always seem to hear about the successful franchise systems, like McDonald’s, KFC, 7-Eleven, Total Tools, Laser Clinics Australia and many more. If we could afford to get into any of these highly successful franchises, it would probably be just like getting a licence to print money. It’s what springs to mind when we think about ‘franchising’ and what it could look like to buy into a franchise. 

 

But not all franchises are created equal. Not all franchises are wildly successful. Not all franchises are a ticket to success and profitability. And not all franchises are a good idea to buy into. 

 

For example, there are so many franchises in Australia that have gone bankrupt and ceased operation, either temporarily, or permanently. If you were one of the unlucky people to invest your hard earned money into those franchises at the wrong times, you’d have lost your investment, and then some. 

 

Eagle Boys Pizza is one example of this. The Australian pizza chain grew rapidly in the 2000s, but, due to the difficulty of competing with Domino’s and other big players, and other financial difficulties, Eagle Boys went into administration in 2016. It hasn’t yet made a comeback.

Here’s a few other examples of franchises in Australia that faced hard times:

Pie Face

Pie Face was a well-known Australian pie franchise that expanded rapidly both domestically and internationally. However, the company faced financial problems and entered into voluntary administration in 2014. Despite attempts at restructuring, many Pie Face stores closed down, and the franchise ultimately struggled to recover. While today you may see Pie Face counters occasionally within petrol stations, and there are a few small individual stores scattered around, the franchise is nowhere near what it used to be.

Noodle Box

Noodle Box was a fast-food franchise specialising in Asian-style noodle dishes. It faced financial difficulties and went into voluntary administration in 2020. Several Noodle Box stores closed down as a result, and the franchise system underwent a restructuring process to try to stabilise the business. While they’re up and running again now, you wouldn’t want to have invested your life savings into this franchise a few years ago, and how it looks in the future remains to be seen.

 

There are so many franchise systems that faltered and ultimately failed in Australia. There’s an old franchise adage that they tell you when you’re first joining a franchise that says that you are “in business for yourself, but not by yourself”. But this adage only works if the franchisor you’re joining stays in business. The foundation needs to be solid.

 

There’s also a lot of limitations that come with the perceived ‘security’ of joining a group of franchises as a new franchisee.

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What you need to know about shed franchise agreements: the bad in franchise contracts

The franchise agreement protects the rights of the franchisor, not the franchise 

One of the most important things that needs to be understood about franchise agreements is that whilst they are written in a way that conforms to the bounds of the Franchising Code of Australia, they are not written to protect the interest of the franchise or the franchisee.

 

In fact, it’s quite the opposite. Franchise agreements are written by the franchisor, to protect the interests of the franchisor. They’re simply written within the confines of the Franchising Code.

 

It’s similar to a rental lease agreement that is written by a real estate agent; they’re written ultimately to protect the interests of the property owner, and the real estate agent. They set out what you can and can’t do with the property, how long you’re committed to the property, when you can exit, or what the penalty will be if you exit early, what they can charge you for, and they can even introduce special terms and conditions that are outside of the usual terms of rental tenancy agreements. But if a franchise agreement is like a rental lease agreement, it’s like a rental lease agreement on overdrive; where the real estate wants to earn the maximum money off of you and your hard efforts.

 

Franchise agreements protect the rights of the franchisor by:

  • Restricting which suppliers you can use and who you can interact with
  • Restricting how you run your business
  • Often restricting who you can do business with in the future
  • Restricting your product and product offering
  • Restricting your pricing
  • Setting out the KPIs you need to achieve 
  • Restricting how you can advertise, if you can advertise, and if so, what you can say
  • Restricting where you can advertise and trade
  • Restricting when you can leave
  • Setting in place what you have to do to leave (pay your way out, for example)
  • Restricting who you can sell to when you leave
  • Ensuring that they can get a good cut of your earnings and profit from you

There are geographical trading restrictions, and they don’t always go both ways

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Geographical trading restrictions can make advertising harder

 

Many franchises in Australia, shed franchises included, will set out where you can and cannot trade. There will usually be set areas that you are only allowed to trade within, or advertise within. 

 

This sounds simple, but can add a lot of time to the process of setting up your marketing ad campaigns (if you’re even allowed to do your own advertising, outside of any joint marketing campaigns that you have to pay towards which promote the brand nationally, and are just as likely to benefit your neighbouring franchises as they are you).

 

Depending on how many bordering territories there are, it can mean adding many very specific geographical targeting pins and exclusion zones to any advertising that you do yourself.

 

It can also feel quite stressful, being always ‘on the pulse’ to ensure that you’re not accidentally advertising outside of your exclusion zone (which would leave you liable for penalties, or worse). It’d be much simpler to simply be able to advertise wherever there is demand for what you offer.

 

You’re often restricted in where you trade, but the franchisor may still be able to introduce competition in your territory in other ways

 

A typical clause in a franchise agreement might refer to a territory in which you would be able to trade exclusively. 

 

But an unscrupulous franchisor might start or purchase a competing brand and have that brand compete against you with what is essentially the same product, in the same territory and there would be nothing that you could do about it.

 

Even when this does not happen, an exclusive territory sounds like a good thing but usually comes with its own restrictions. Because your exclusive territory is usually the only territory you’re allowed to trade in. If you find your customer pool is too small, you can’t expand it geographically. 

 

There might also be another franchise as part of your franchise’s network, in a closely neighbouring territory, and you may lose customers to them. Their location may be more convenient to the workplace of the customer, or the customer may be located right on the boundary between one territory to another. You can’t advertise outside of your boundary, but you aren’t guaranteed to get the full business of those inside your boundary.

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You’re limited in your marketing capabilities

Today, anyone can purchase any shed from anywhere in Australia online and have it delivered to their home or place of business. As a territorial franchisee without your own website, you are limited and disadvantaged from selling across the country.

 

You could think of some new target audiences that would be perfect for buying the sheds. But if they’re outside the realms of your geographic location, you can’t advertise to them. 

 

In some cases, you might not even be allowed to advertise at all, outside of their group marketing efforts (which you have to pay towards), or you may need to get their pre-approval (meaning that your good ideas are also handed over, to do with what they will). 

 

In many cases, you’ll also be restricted with what you are allowed to say, and how you’re allowed to say it.

 

You’re not left with much to set yourself apart from the pack

Another problem is, in a franchise, nothing differentiates you from the other franchises of the same name, product, branding and process. You have very little product differentiation. 

 

A shed is a shed, it’s a commodity product. Your prospective customer is not going to buy a shed from you because you have some sort of “brand”. They will buy from you because you are a better salesperson, or you offer a cheaper price. 

 

Same as any other competitor in your area. This is the case for your sheds, others in the same franchise, and other businesses in any franchise. To the customer, a shed is a shed. You have to offer something different in order to stand out. A better product, a product more aligned to what they want, or a better price. 

 

If you’re in a franchise agreement that the prices and profit margins have restrictions placed upon them, it’s even trickier. You can’t control one of those main differentiators. If you’re limited in the products you’re allowed to sell, you lose another.

 

The franchisor controls how they distribute leads

Often franchisors have corporate websites, which host the information for each of their locations. You may have a small location page dedicated to your location, or you may not. 

 

Advertising they organise is usually paid for from a joint marketing fund (which you need to contribute to, as part of your arrangement). The leads they get through that website, is controlled by the franchisor. They can choose to distribute those leads as they see fit, to you or someone else. In many cases, you’d never even know about a lead, unless they chose to give it to you.

They’ll usually lock you into certain suppliers, for their benefit (not yours)

The franchisor usually enters into a supply agreement with a national materials supplier, from which they get a ‘kickback’ on your sales. 

 

This means that it’s in their best interest to contractually oblige you to purchase products from the supplier/s of their choice. 

 

Being locked into one supplier means you don’t get much movement with the cost and price, and you don’t get much choice with the product itself that you sell. If your customer wants another steel supplier, or products with different qualities, you simply can’t help them.

 

When you’re committed to just one supplier, or a select set of suppliers, that supplier doesn’t have to compete with anyone to get you a good deal. You pay whatever they (or the franchisor) decide the cost is. As we mentioned, supply agreements made between the franchisor will usually give the franchisor some kind of financial benefit or profit from your sales.

 

You’ll usually have to meet set KPIs, and can lose your franchise if you don’t meet them

Franchise agreements usually include performance agreements, meaning that you agree that you will make X number of sales over Y period of time. 

 

If you don’t meet the performance criteria, you could lose the franchise, or have some other negative consequence that the franchisor is able to do according to the terms of the franchise agreement.

 

This also means that you are at the mercy of the franchisor in the bad times. If the franchisor has a beef with you for some reason, this can be bad.

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Restrictions in your franchise agreements could mean you aren’t allowed to meet your customer needs, even if you have a way to

 

Say a customer asks you to quote on a shed with an unusual design. What you would normally do is to approach your franchisor and ask for a special design

 

The franchisor might say, “no we don’t do that”. Your response might be “ok, I know where I can get that done, thank you”. But there is a clause in the franchise agreement that prohibits you from purchasing any product from any other supplier. This means, you cannot meet the needs of your customer, because you’re not allowed to do so. Even if you have a way. 

 

This restriction could seriously restrict your income and profitability. 

 

The terms are long, but they’re also finite

 

Terms in franchise agreement have a defined time. This is usually something like a 5-year term. This is a two-fold problem. 

 

Firstly, you’re locked into that term, and it’s usually a long one. Some franchise agreements put so many penalties and fees in place for leaving, that you feel like you’ve practically got to sell your first born son to get out of them. 

 

So if you sign up and decide that the franchise is not for you, or the business of sheds overall is not, you’ll likely feel like you’re backed into a corner, and have to go through with that term anyway.

 

The other side of it is that after the first 5-year term, it’s not a foregone conclusion that you will be granted a second 5-year term. 

 

It is practically a matter of fact that if you have had a bad relationship with your franchisor in the first 5-year term, you will probably not be offered a second 5-year term. It’s another, more subtle way, that the franchisor has power over you, if you want a second term, you want to keep in their good books. 

 

Even worse than this? If you are a highly successful franchise, there is a real incentive to the franchisor to not grant you another term, and to instead simply resell the franchise to another party — at a greatly increased price, on the goodwill that you created. It sounds shady, but sadly, it absolutely happens.

 

You are taking all the risk. 

 

Whilst the adage “in business for yourself, but not by yourself” may have some truth to it, bear in mind that if you fail, the franchisor will not fail because of your failure. 

A franchisor, by their very nature, has dozens, if not hundreds, of other franchisees that provide income for them. So they can shoulder some failures, even budget for them. You however, stand to lose a great deal if your franchise fails.

There are many considerations for buying into franchises, and they’re certainly not all good. 

As you can probably devise, it’s really important to very carefully consider all of the factors and ramifications of buying into a shed franchise before you do so. There are many elements of the shed franchise agreements that can have a significant impact on the way you do business (or don’t do business). 

 

Shed franchise agreements are written by the shed franchisor, to protect the rights of the shed franchisor. They’re full of limitations and restrictions that the franchisees want to abide by, if they want in. These need to be abided by for the entire duration of the contract term.

 

But it can get worse. Especially when it comes time to leave the franchise. 

 

Be sure to check back for next month’s conclusion of the Good, the Bad and the Ugly of buying into a shed franchise, as we take a look at what happens when things go south: the ugly parts of shed franchises in Australia.