Chief executive Australia, FRANdata, one of the US’s largest providers of business intelligence on franchising.
Darryn McAuliffe CPA has been involved in franchising both as a banker and now as chief executive, Australia, for FRANdata, one of the US’s largest providers of business intelligence on franchising. The franchising sector has given many small business people their start, but the lenders funding these enterprises need more information.
"Australia is the most franchised nation on Earth. It has three times as many franchises per head of population as the US. Franchising contributes A$130 billion to the Australian economy, employing 400,000 people across 1180 brands and 73,000 outlets.
"It’s hard to pinpoint why franchising is so popular, though comparatively low failure rates, sound profitability and the lure of running your own business all rank highly. Perhaps it also has something to do with the fact that outside of the capital cities, Australia has a strong provincial network – there are 38 centres where the population exceeds 30,000, providing good scale to launch a franchise business.
"A history of immigration could also be a factor. Franchising can be an attractive way to pursue opportunity without necessarily having detailed local business knowledge.
"Franchise business owners face the usual small business challenges of unpredictable trading patterns, recruiting and retaining productive labour, and an increasingly competitive landscape. On the plus side, franchisees have access to the additional support, marketing and product innovation provided by the franchisor. These are, of course, in effect paid for via establishment and ongoing royalty fee structures.
"But raising finance can be a particular issue for franchisees. On the whole, lenders have an uncertain view on franchising and an inconsistent approach to this sector. Like many stakeholders, they find it difficult to distinguish high-quality systems from lower-quality participants.
"Lenders are most likely to support and assign higher lending ratios to those franchise brands they understand well and which have provided a sound asset-quality experience in the past.
"That means, for an individual franchisee, the battle could be lost on the reputation or low visibility of the brand before their individual application receives any meaningful consideration by a lender. [McAuliffe was formerly national head of franchise lending at National Australia Bank, where he presided over the accreditation of more than 40 brands in the franchise sector.]
"I moved from the banking side of the equation to FRANdata because I felt the information gaps and finance challenges for franchisees were increasing despite the efforts of many."
"The banks say they’re 'open for business', and for small business applicants able to offer property-backed security that’s realistic. But banks’ franchise accreditation programs – where accreditation of an overall brand means more ready support for individual franchisees – appear to be in a reduction rather than expansion phase.
"I moved from the banking side of the equation to FRANdata because I felt the information gaps and finance challenges for franchisees were increasing despite the efforts of many.
"The banks were well intentioned, the franchisors were well intentioned, but at the end of the day the franchisees often didn’t see progress because of the 'information gap' – the supply of information on franchises wasn’t keeping up with the demand for it from lenders.
"That said, the outlook for franchising is bright in Australia and the sector will benefit as the recommendations from last year’s government-commissioned review of the Franchising Code of Conduct, by Alan Wein, are implemented.
Trick of the trade
Most of us associate the start of franchising in Australia with the arrival of Kentucky Fried Chicken and McDonald’s (in 1968 and 1971 respectively).
But, by definition, the first known franchise activity in Australia was in 1810, when Governor Lachlan Macquarie granted a “franchisee” the right (Royal Privilege) to import 45,000 gallons of rum over three years in exchange for building the Sydney Hospital (known as the “Rum Hospital”).
This article is from the April 2014 issue of INTHEBLACK magazine.