Are Fast Food Franchises In Australia Still A Good Investment?

Are Fast Food Franchises In Australia Still A Good Investment?

Read time: 4 minutes, 25 seconds.

If people like you they will listen to you, but if they trust you they will do business with you.” – Zig Ziglar, Author

A lot of franchises spend years working on their brand to build that trust with their audience. That is invaluable. It takes a lot of time and hard work to earn the trust of your audience. When this happens, though, you have loyal customers who will attract more customers like themselves. 

That’s how a lot of fast-food franchises get to where they are today. Many fast-food companies dominate almost any market they are present in.

Fast food, according to IBIS World, is any food item that is sold in takeaway packaging for immediate consumption. A lot of the usual run-of-the-mill quick bites will fall under this category of fast food. So, foods like pizza, burgers, sandwiches, or any takeaway food that you can get from a restaurant.

 

Understanding the franchise set up

It’s important to note that the term ‘franchise’ doesn’t include the parent company. A franchise is an outlet or restaurant operated by the franchisee. In this arrangement, the franchisee pays fees to the franchisor to use their business name and business model. 

In most cases, the franchisor will provide continuous training and marketing benefits to the franchisee. In exchange for this, the franchisee is then locked into recurring royalty payments to the franchisor. Finder.com states that the initial start-up cost for a franchise can be anywhere from $50,000 to $1 million.

Now, outside of that initial acquisition cost, there are other fees that you need to know about. Your extra fees include the ongoing payment that you will make to the franchisor. The amount for this fee varies from franchise to franchise. The royalty fee is either a percentage of your total sales or it can be a fixed cost.

In other industries you often find yourself facing hidden fees you didn’t know about upfront. A franchisor is bound by law to be completely transparent with you about any extra costs that you are expected to cover.

The fast-food franchising market place today

Fast-food franchises account for only 19% of today’s franchise marketplace. While this is a small part of the market, fast-food franchises still need the most investment to get off the ground.

Investing in a franchise can potentially be more successful than starting a new business from scratch. While that is true, franchisees inside and outside Australia complain about not making a fair profit from the investment. Your franchise royalty fees will range from 4% to at least 12% of your revenue.

Let’s take Gelatissimo, for example. The initial investment for a Gelatissimo franchise will cost you at least $50,000. They have a fixed royalty fee of $250 per week. When you do the math, that works out to $13,000 per year.

That’s a lot of money, especially if you’re taking out a bank loan for this.

tHE ALTERNATIVES

Don’t decide too quickly that the fast-food franchise sector is not for you. There is no one way to approach this business. Of course, you can get a bank loan, but there are also other options out there.

Founder of Geeks On Call, Richard Cole, once said, “You can’t do well unless your franchisees do well.” 

Many franchisors take this to heart. Bear in mind that these franchisors spend decades building up their brand reputation. How one location is seen also reflects on the rest.

So you will find that a lot of fast-food franchises provide vendor financing to prospective franchisees. With this, the franchisee pays their recurring royalty fees as usual, plus an agreed-upon premium. Or the franchisee can use extra profits to buy out the franchisor’s stake in the business.

Family financing is another acceptable funding channel. With both vendor financing and family financing, though, the franchisor takes on a high risk. In both cases, the franchisee can provide no real security if family funding falls through. Or if the franchisee simply can no longer pay, then the business falls back onto the franchisor. 

When it comes to financing a fast-food franchise acquisition, banks and other financial institutions don’t offer more than 50% to 70% of the cost.  For any more funding, you’ll need to put forward some residential property as equity. According to Finder, despite popular opinion, franchising isn’t the magical revenue source that people think. So do your research first before making that decision.

If you need assistance working through your own financial situation to make the final decision MLS Finance are here to help you along this journey.

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📩 Email: enquiries@mlsfinance.com.au

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