The Franchise Council of Australia honoured the best of the best in the franchise sector at the 2011
Westpac FCA Excellence in Franchising Awards Gala Dinner on Tuesday night.

Hairhouse Warehouse won the major award of the evening ‐ Established Franchisor of the Year. Co‐ founders Tony Lattouf and Joseph Lattouf believe the recognition proves the success of their business model.

“Our business has been recognised by the most credible authority in franchising,” the pair said.

“This award reinforces our leadership position in the Hair and Beauty Industry. It means that we can leverage the award to attract a greater team and greater franchisee prospects.”

The Coffee Club was also a big winner with awards in three categories including Excellence in Marketing, Multi‐unit Franchisee of the Year and Franchisee of the Year ‐ two or more staff. Nick Vincent, General Manager Marketing at The Coffee Club said the awards built credibility for the team.

“The marketing award means more franchisee engagement in our marketing programs because we have been recognised as being marketing leaders within the franchise industry,” Mr Vincent said.

“The entire awards submission process was beneficial because it gave buy‐in across all departments. It reminded us too, on the efforts the marketing team put in to rolling out national promotions.”

The event, one of the most anticipated on the franchise calendar, was held in the Grand Ballroom at the Sebel Albert Park and attended by more than 500 people.

The awards held at state and national level each year represent the pinnacle of franchise achievement and are a celebration of the hard working teams and individuals in the industry.

FCA Executive Director Steve Wright said in difficult economic times the Australian franchise sector has outperformed the rest of the small business market.

“These outstanding businesses and individuals are great examples of the entrepreneurial skill and determination that has made the sector so resilient,” Mr Wright said.

Chair of the independent judging panel Professor Andrew Terry from University of Sydney Business
School said the caliber of this year’s award winners was extremely high.

“All of this year’s winners have certainly set the bar very high for others in the franchising sector to try and emulate. To all those that didn’t win, the awards process still enables people to have a very good look at their businesses and see where they can improve moving towards the coming year. In essence, everyone who enters these awards is a winner,” Professor Terry said.

The Franchise Council of Australia is the peak industry body for the $128 Billion Australian franchise sector representing franchisors, franchisees, suppliers and advisors.

To view photographs from the evening click the link below and enter the password nfc2011.

2011 Westpac FCA Excellence in Franchising Awards Gala Dinner

The Winners

Established Franchisor of the Year Winner: Hairhouse Warehouse Runner‐up: PoolWerx

Emerging Franchisor of the Year Winner: Appliance Tagging Services Runner‐up: Mad Mex Fresh Mex Grill

Multi‐unit Franchisee of the Year

Winner: Carolyn and David McManus ‐ The Coffee Club, Qld

Runner‐up: Irene and Ian Hughes ‐ PoolWerx, WA

Franchisee of the Year – more than two staff

Winner: Kevin and Joanne Gooch ‐ The Coffee Club Midland Gate WA Runner‐up: Anthony Smith ‐ Mortgage Choice, Cheltenham Vic

Franchisee of the Year – less than two staff

Franchise Council of Australia
Media Release

Winner: Fiona Edis ‐ City Farmers Dogwash, Como WA

Runner‐up: Rosemary Harmata ‐ Lollypotz, Chatswood and Sydney CBD NSW

Franchise Woman of the Year

Winner: Belinda Sugars, Mortgage Choice

Runner‐up: Louise Curtis, Lollypotz

Franchise Executive of the Year

Winner: Cameron Graham, ANZ Mobile Lending

Field Manager of the Year

Winner: Andrew Walker, PoolWerx

Runner‐up: Judd Sandwell, Chicken Treat

Supplier of the Year Winner: Silver Chef Runner‐up: Whirlwind Print

Contribution to Franchising

Winner: Derek Sutherland, ICON Law

Runner‐up: John O’Brien, PoolWerx

Excellence in Marketing Winner: The Coffee Club Runner‐up: Hairhouse Warehouse

Franchise Council of Australia
Media Release

International Franchising Winner: ActionCOACH Runner‐up: Keen to Clean

Franchisor Social Responsibility Winner: Hairhouse Warehouse Runner‐up: Zambrero

Franchisee Community Service

Winner: Dean Mackie ‐ McGrath Estate Agents, Mosman, Northbridge and Neutral Bay NSW Runner‐up: David and Belinda Clarke – Bakers Delight, Stirling SA
2011 Franchise Hall of Fame Inductee Noel Carroll, Founder Michel’s Patisserie ENDS

Franchise Council of Australia Executive Director Steve Wright says the Bill in its current form is not the same as the one originally presented to the public for consultation earlier this year.

“It now includes de-facto franchising legislation, which will be an extra hindrance for small business in South Australia. SA already trails the rest of the nation in terms of business confidence. This can only make a bad situation worse,” Mr Wright says.

Cartridge World Master Franchisee Kurt Muller says the Government should be assisting small businesses, not adding more stumbling blocks.

“As a master franchisee based in South Australia with franchisees also in Victoria, Tasmania, West Australia and Northern Territory, I believe that if the South Australian Government was to pass this legislation it will add further complications to our business by adding additional legal fees, red tape and paper work in an already very challenging business environment,” Mr Muller says.

“The Government should be focused on assisting small business to get on with the job of creating employment, growing business, and kick starting the economy, not adding additional road blocks when the current Franchise Code of Conduct offers all stakeholders consistent, national guidelines and protection.”

Outside Concepts’ Jock Dean says the legislation will cost small business in South Australia money.

“My initial concerns with the Bill is that it may well decrease the value of a franchise, because there is the potential of the whole system being devalued because of the new layer of laws that would be imposed by it being passed,” Mr Dean says.

Your first step should be to determine what the ideal business is for you? Create a need and wants list and ask yourself some simple questions. If you found the ideal business what would it look like? What industry will it be in? What impact will it have on my family or social life? Can I afford it? How much money can it make me? Will it provide an improved financial position and lifestyle?  And Will I have an asset to sell at the end?

You may also ask does my previous experience dictate what businesses or industries I should look at. So if you are a successful restaurateur, you could consider a food franchise. But, you are not confined to opening a restaurant by any means, In contrast, some entrepreneurs choose to buy franchises in industries they have no experience in, often because they have a passion for a particular market. While these business owners will not have the benefit of experience in this type of business, their enthusiasm for their new business can give them an edge.

Many franchisors don’t look for franchisees that have industry experience, this way you are easier to train and you don’t come with pre-programmed habits on how it should be done and you will more likely follow the system.

If you are considering entering a new industry, try to choose something you are interested in. If you would rather have elective surgery than vacuum your rugs, a carpet-cleaning franchise is probably not the best choice for you. Your franchise will be a huge part of your life for the foreseeable future. Make sure it is something you will enjoy.

Once you have found the franchise you are interested in, you may be asked by the franchise company to attend several interviews and complete an application so they can assess your suitability to the business. This process should be done at your own pace and never rushed, make sure all your questions have been answered to your satisfaction and you are clear of the obligations that the franchise agreement contains. You will be unable to enter into an agreement or sign up for a franchise until you have been given at least 14 days to assess the legal documents provided by the franchisor and then you will also be given a 7 day cooling off period after signing.

Many Franchisors choose to outsource the recruitment and screening to professional selection companies like Franchise Selection who have to ensure that each candidate meets the standards set by the Franchisor.  They will also arrange several interviews including a telephone interview after the enquiry is made as well as many face to face meetings. Once an application is received all applicants are reference checked and checked for criminal history. Each candidate is guided through the disclosure documents and Franchise Agreements and they will ensure that all candidates seek independent legal and commercial advice in relation to the purchase of the business; they will also ensure that the candidate is financially sound and has the proper financial resources before they are presented to the Franchisor or their approval board for final approval. This really takes the selling out of granting franchises and you are selected or declined based on your skills, personality and overall fit to the business.

If you are having trouble finding a franchise that is a good match for you, perhaps you need to revisit why you were considering buying a franchise in the first place, usually after many weeks of searching for business it is easy to be confused and nervous and you may even start to doubt yourself.

Most potential franchisees who are looking to buy a franchise are generally trying to change something in there life, for some it may be their career, for others maybe their financial future or lifestyle and no matter how hard you look or what ever you may be told by different businesses, all business opportunities will involve some level of risk, but don’t let caution or fear stop you from trying, who knows you may be very successful or you may fail. The one thing that is certain for your future is that if nothing changes, nothing changes!

Although there are distinct advantages to being a franchisee, not everyone is cut out to own a franchise, and there are some disadvantages as well. But if you are undeterred, begin researching the various franchises in the industry you have chosen. Even if you have your heart set on a particular brand name, you owe it to yourself to do the due diligence. Compare the offerings of the various industry leaders, talk to former and current franchisees, and crunch the numbers with your accountant and make sure you obtain legal advice. Visit all the nearby franchise locations in your area to get an even better sense of the franchise’s “personality.”

Once you have done your research, you may find that the franchise you were so excited about is not perfect, it won’t be. Like everything in life it will have its plus’s and minus’s, but if you are willing to follow the system and work with the franchisor it will deliver a reasonable result for a reasonable effort and you will have the enjoyment of working for yourself but not by yourself. Plus, your excitement about the company will make you a great candidate for a franchisee and an excellent brand advocate.

In the end, there is no formula for finding the right franchise. It is as much about your instincts and gut feel as it is about dollars and cents. Of course, you want to shop around for the very best deal and find a franchise that will deliver an excellent return on your investment. But much of finding the right franchise has to do with how you feel about the business and the brand. If you enjoy what you are doing, follow the system, believe in the brand, and are passionate about the business, you will most likely be successful and hopefully have a valuable asset to sell in the future when you are ready for the next challenge or retire.

Matching your personality/lifestyle etc – Conducting research/due diligence

Franchising is a popular method of doing business and your chances for success are greater than those of independent business owners. To ensure survival you should follow some basic but vital steps. Essentially, do your due diligence or you could risk everything.

Have you ever wondered if you have the personality and skills to be a successful franchisee?

There are over 1,200 franchise companies operating in Australia, each requiring a plethora of different skill sets in a franchise owner.

Some companies say they have many franchisees that came from corporate downsizing, former CEOs and CFOs and such. Others claim they don’t want franchisee candidates with too much structure. Some companies want a marketing and sales background and others prefer someone without preconceived ideas so they can train that person in their system, their way.

Confusing? You bet! But there are a few key characteristics that you should be aware of to determine if franchising could work for you. Consider the following:

Comparison shop.

Even if your heart is set on one company, it never hurts to look at other opportunities to make sure you are signing on with the best concept for your skills and interests. One way to do this is by attending a franchise tradeshow and/or using a franchise consultant who will match your criteria to a number of companies that match your criteria. There are also numerous Web sites that allow you to see a snapshot of several concepts at once.

Find out what training and support (technical, administrative, training, etc.) the franchisor provides. One of the advantages of buying a franchise is that the franchisor provides intensive training on how to run the business and offers some kind of ongoing support.

Talk to existing franchisees.

This is an important step because they can give you honest feedback and substantiation of what the franchisor tells you. Ask them about their experiences, good and bad, and if they have any advice for you. Create a list of questions to ask so that you are prepared!

Making Connections.

A successful franchisee needs good interpersonal skills. Seem obvious? Well think about this carefully. In your current and past jobs, did you really enjoy working with people?

A franchisee will need to manage employees and work to retain them. You’ll have to build good-will with your customers and gain their loyalty and trust. In many cases, a franchise owner’s role will be to make community connections by joining local organizations and networking with various groups.

If you are truly a people person, you have one of the most valuable assets to successful franchise ownership.

Following a System.

Many people think being your own boss requires you to be a true entrepreneur, someone who wants to take charge and challenge each step in the process. That’s simply not true for franchising. If someone has already done the work, tested the procedures and proven that a system works, a clever person will pay attention and follow that system. This person is truly focused on success.

Someone willing to listen and learn from others to avoid making mistakes will avoid many of the pitfalls of business ownership and find success sooner. That is the essence of franchising.

Willing to Ask for Help.

In the same vein, a good franchisee candidate is someone who will let the franchisor help and support them. At most franchise companies, there are teams of people who will train you in every aspect of the business. There are people to call for help. There are people who will come to your place of business to show you the way. The motto of franchising is that you are in business for yourself but not by yourself. It is up to you to take the help and follow the advice. When you are successful, the franchisor is successful.

Doing whatever it takes.

There is just no substitute for hard work, particularly during the first year. A successful franchisee is someone who is willing to do whatever it takes to get the job done. They show their employees by example. They put in whatever hours necessary to get the job done.

If you are someone who understands what it takes to be successful and have the motivation to make your business succeed, you have the cornerstone of a winning franchisee personality.

Avoiding Risks.

Starting a business by yourself is taking a big risk. Buying a franchise can help reduce the risk. In fact, successful franchisees are typically risk averse. They want to minimize their risk as much as possible and so they choose a strong franchise system with a proven track record.

If you love to take big, bold risks, franchising probably isn’t for you. If you are careful and thorough in your franchise research so you know just what you are signing up for, then you have the stuff to succeed as a franchisee.

So, how many of these qualities do you have? Unlike a magazine survey on health concerns, you can’t get some of the answers wrong and still be in good shape. You need all of the above attributes to consider yourself a great candidate for franchise ownership.

This new business you are considering is your business and the money you invest is your money. You’ll want to have every advantage possible to make it successful. So before you begin research on a franchise company, do some soul searching about your own assets and how they fit with a franchise opportunity.

There’s nothing more exciting than embarking on that road to owing your own business. Just make sure you can avoid the speed bumps along the way.

Where can I look for a franchise?

There are many good sources of information about franchise opportunities. For most people, the process that makes the most sense is to first make sure you understand the business model of franchising. After you’re clear on what franchising is all about, then you can try to identify industry segments that may be of interest to you. Finally, you can research individual companies to see which ones match best with what you are looking for in a franchised business opportunity.

There are many good reference books and articles you can use to understand franchising in general and business format franchising specifically. The best sources to rapidly access this information at no or very reasonable costs are:

• Internet web sites
• Industry magazines
• Trade expo’s
• The public library
• A good bookstore
• A franchising consultant

What should I do before I begin searching for a franchise?

Before you even begin looking at franchises, you need to do an introspective self-evaluation of your own strengths and challenges. Sit down, get out paper and pen, and as objectively as possible answer these questions:

SKILLS / STRENGTHS

• What part of your current and past jobs have you liked doing the most?
• List your skills and evaluate how well you perform each.
• Describe the work environment that most appeals to you.
• What skills/hobbies do you have that may be applicable to a franchise business?
• Are you status conscious? Does it matter to you what the product or service of the franchise is or does the business potential matter more?
• Are you comfortable with sales and the sales process?

CHALLENGES

• What part of your current and past jobs have you liked doing the least?
• List your weakness, those things you’d not want to do or would want to hire someone to do in a business.

MANAGEMENT SKILLS

• Do you have experience managing employees? Did you enjoy it?
• Are you comfortable with recruiting employees?
• Do you have the experience and skill needed to create a work environment that will allow you to retain employees?

FINANCIAL CONSIDERATIONS

• How much capital do you have to invest?
• Can you afford to do without a regular income during the start up phase of your new business?
• What are your financial goals?
• How do you see your lifestyle changing as a result of meeting your financial goals?
• How do you feel about taking the risk of becoming self-employed?

ARE YOU A TEAM PLAYER?

Franchising is all about following someone else’s system. Can you picture yourself in this role, executing a system you didn’t create?

Once you have answered these questions, you’ll begin to see a clearer picture of what talents you can bring to a franchise business and what you expect to receive in return. The next step is to start looking at opportunities and evaluating them based on your answers. It may take some effort to find the right franchises so don’t compromise.

Do I need to have previous industry experience?

No, in fact most franchisors are looking for people with no experience in their industry. This is because they want their franchisees to focus on running the business and not performing the labor their concepts require. Franchisors need people who can be effective in areas such as motivating employees, generating sales, and running the day-to-day operations as efficiently as possible. The franchisee role is typically one of management rather than labor.

How do I choose the right franchise for me?

Like any major life decision, buying a franchise requires careful consideration. There are two ways you could make a mistake. The first is that you fail to do thorough research and end up buying the wrong franchise. The second is that you fail to do thorough research and so lack the confidence to buy the franchise that is right for you.

The point is that when evaluating a franchise opportunity, you should be able to eliminate those that don’t meet your needs and won’t help you reach your goals. When you find an opportunity that you can’t eliminate, you’ll know that this is the “one.”

At Franchise Selection, helping people find their ideal franchise opportunity is what we do. As a result, we have worked with thousands of people looking to find the right franchise and realize their dreams.

Here then is our recommended approach of determining what to look for in a franchise that will meet your needs, expectations and goals:

STEP 1.

Before you start looking at franchises, take stock of that most important component of the equation – YOU. There are certain traits that fit a person to franchising. Other traits suggest you would be a poor fit for a franchise system. Some perfectly good traits for running a business for yourself, don’t fit well with franchising. Independence is one of them. Franchisors need people who take direction. A franchise doesn’t want a maverick.

Are you a person who has always been willing to work hard? This trait will serve you well. Franchisors have found that working hard is more valuable than creativity. A common saying for success is 5% inspiration, and 95% perspiration.” The franchisor has already developed the business model. They’re also looking for someone who is willing to put in the hours, however long they may be. If you are longing to set your own work schedule, choose your franchise wisely. Most don’t allow that luxury.

STEP 2.

Next why are you researching this franchise? An inexperienced person may approach the process by thinking, “Well, I love coffee. How about a coffee shop franchise?” And after spending days or weeks of research on brands like The Coffee Club, Gloria Jeans and others, the individual may find he doesn’t have the required capital, the territory or site he or she wants is not available, and they’d have to give up weekends if they owned a hospitality franchise.

Another ineffective way to begin your franchise research is to lock yourself in to one or two concepts. If you think, “I’ll only look at ice cream or food franchises,” you may miss finding that that gem of a concept that would mesh perfectly with your needs.

With hundreds of franchise companies available, keeping an open mind is the best strategy you can employ to get on the ground floor of that new, hot concept or to find something that will really take off in your market.

STEP 3.

Let’s say you’ve found an assortment of franchises that look promising. What do you do next?

Contact the franchisors and request information about their concepts. You will probably get a call from someone in the franchisee recruitment team who will gauge your interest and advise you if the territory you seek is available. You will want to thoroughly view the web site information and any brochures and videos they send you and perhaps fill in an application form and attend several interviews or meetings.

Keep notes on your impressions. Are their materials professional and up-to-date? Are you treated courteously by a friendly and knowledgeable member of their team? Are your questions and concerns answered to your satisfaction?

What you see from the company at this time may be an indication of the type of support you would receive as a franchisee in their system. So poor service now may reflect their attitude towards their franchisees and is worth discussing these concerns when you speak with existing franchisees.

STEP 4.

Your next step is to read the company’s Disclosure Document, a document every franchise in Australia is required to provide. From this you will learn the history of the company, and what costs, royalties and fees you will be required to pay.

Some franchisors also provide earnings claims in the disclosure document but beware these will only be modeled on a typical scenario that may be achieved and are not a guarantee of future earnings or a profit forecast but will help you estimate the potential of the business.

By paying attention to what you discover in a company’s disclosure document, you can weed out franchises that just don’t measure up. Some warning signs of a franchise that is facing challenges are extensive litigation with franchisees or a closing rate of units greater than what’s being opened.

STEP 5.

We consider this step to be of monumental importance when judging the likelihood of finding happiness in a particular franchise: CALL EXISTING FRANCHISEES!

Existing franchisees are your best source of information for finding out what really happens in a business on a day-to-day basis. You can ask what they like and dislike about the business, if they are happy with corporate support, and even get a feel for the type of earnings a franchise makes.

Realise that franchisees can be suspicious when you call on them. Could you be someone working undercover for the franchisor? So start out focusing your questions on things that relate to your priorities. This doesn’t force the franchisee into a corner where he/she is wondering if the answers will result in trouble with the franchisor.

Also be wary of the franchisee that is in trouble and wants to sell their franchise location to someone else. They may be looking for the best way to get out of a bad investment and don’t want to take any chances that something they say will hurt their ability to sell.

In addition to your priority questions, make sure you ask about the good experiences they have had with the franchisor, and any bad experiences that they have had. Ask questions about how much support they get. Find out how long it took to break even. Find out if they found the financial information in the disclosure document accurate. And be sure to ask if they would still invest in the franchise today if they could do it over again.

Watch for any indication that the franchisee is reluctant to talk with you. If this happens with one franchisee, it could the just be that person’s manner. But if it happens in more than one unit, it could be a warning sign that everything isn’t OK.

You may find that some franchisees are doing well. Others might be struggling. Do your best to sort out why this is the case. Be careful that your natural optimism for the system doesn’t prevent you from asking tough questions. Cultivate a little pessimism if it isn’t natural to you. Look for signs that things are not as they should be. You won’t see them if you aren’t looking for them.

It is also very important to speak with franchisees that have left the system. If someone was terminated, get both sides of the story. Often the truth lies somewhere in between both sides. But you cannot know until you listen to both parties.

Not all the information you discover will be negative toward the franchisor. You might find that someone chose not to renew their franchise because it was time to retire. Another person might have had a family need.

Gather a variety of opinions and you’ll get a clear picture of not only the franchise itself but of how you’d fit into the organization. That is why this step is so significant to your being able to make a definitive decision.

STEP 6.

Visit competitors. Ask to speak with the franchise owners. Don’t get your heart so set on one franchise, that you don’t study the competition. By comparing systems, you’re more likely to pick a system that really works for you. At the very least, you may discover that the franchise system has problems that you don’t want to get involved with.

Another way to research competitors is to look at their websites. Many websites have information about franchising with the company. Even if the company doesn’t have a franchise system, the about us page often gives you useful information.

Above all, ask the franchisor:

What do you see as the future of the industry you are in?

Where does this company stand in its industry?

What do you do to keep up with developments?

Is there a viable market for the franchise’s product/service?

Is there still room for growth?

What is its marketing positioning, e.g. price, image, quality?

How does the franchisor maintain margins?

How dependent is the business on price competitiveness?

How good is the competition? These questions apply in all industries, from retail to lawn mowing.

What direction is the franchise company moving in? For example, is it adopting new technology as it becomes available/affordable? Is this important? How will new technology affect costs for franchisees?

What exclusive rights to a territory do I get? Can my territory be eroded by the franchisor? At a later stage, can I sell off part of it if I choose to? How do you define a territory, e.g. how many businesses, homes, geographical area, people, type of population? Do I get first option on an additional territory?

Who finds a site/conducts market research, etc? How is it done?

It is important to get a feel for how ethical a franchisor is. It is difficult to ask questions which uncover this, but try to find out about their reputation from external sources as well as asking the franchisees themselves. Always ask several sources, and don’t be afraid to take up references – that is what they are for. If all the above seems a bit daunting please don’t be put off. Franchisors are used to answering questions about their businesses, and expect to have to satisfy enquirers and their professional advisors as to the integrity of their business. You owe it to yourself to be thorough.

If you are thinking of buying a franchise, it will pay you to sit down and work out what you need to know before you meet with the franchisor. It will probably take several meetings, with increasing levels of detail, before you are in a position to make your decision, so be prepared for that.

If all the above seems a bit daunting please don’t be put off. Franchisors are used to answering questions about their businesses, and expect to have to satisfy enquirers and their professional advisors as to the integrity of their business. You owe it to yourself to be thorough.

If you are thinking of buying a franchise, it will pay you to sit down and work out what you need to know before you meet with the franchisor. It will probably take several meetings, with increasing levels of detail, before you are in a position to make your decision, so be prepared for that.

STEP 7.

The last step, of course, is making the final decision. Like any major decision, you will be filled with anticipation and anxiety, excitement and fear. Those are very normal feelings, experienced by almost everyone. But if you’ve done your homework and followed the steps as outlined, you should be very comfortable with your decision and ready to become a franchisee.

The step you are considering is a major one so don’t try to do it without taking proper advice. But remember – you will not be doing this work in isolation. You need to enlist the help of suitable advisors (at least a lawyer and an accountant) to help analyse the franchise relationship and it’s potential. It will also be their role to explain to you the implications of the various choices you are now making, so don’t skimp on this advice.

Finally, please don’t be tempted to think that a few hours surfing the Internet is any substitute for doing proper research. There’s some great information available on the internet but there’s no substitute for asking hard questions and getting answers that are individual to your own position and your chosen franchise. Buying a business affects your family, your finances and your future. Do everything you can to ensure that it will be the best decision that you ever make.

Assess Your Suitability for Running a Franchise

Identifying a franchise product or service that interests you is only one-half of the equation in determining if a franchise is the most appropriate career path for you to pursue. The second, and perhaps more critical, half of the equation involves evaluating whether the dynamics surrounding franchise ownership are something that you not only can live with, but can actually thrive under.

How then do you determine if you and a franchise are suitable for one another? Ask yourself the following questions to gain insight into how your own personal approach to business aligns with the operational procedures and responsibilities associated with running a franchise, as well as the emotional components that can arise from such a business structure.

• Do I mind having many of my business decisions (e.g., location, hours of operation, inventory, and marketing) made by other people or will having these decisions made for me actually ease my burden in running a business by freeing up my time and energy to take care of other matters?
• Am I committed to making someone else’s business idea succeed for my own potential long-term benefit or do I need a business of my own creation to bring out the best in me?
• Will operating a franchise make me feel as if I’m still working for someone else or will it actually provide me with a satisfying sense of accomplishment?
• Do I work best within a structured system, as it tends to keep me focused and potentially relieves me of stressful responsibilities that I’d rather not have, or is the overall structure of a franchise too inflexible for me?
• Do the goals and actions of the franchise that I purchase need to be compatible with my own ideas or can I easily separate the franchise’s approach to business from my own personal agenda? Will I be able to reconcile my personal feelings and beliefs if the franchise has different values, emphases, etc than I do?
• Does my general personality mesh with being a franchise owner? Can I be a leader as well as a follower? Do I have an upbeat “can-do” attitude that ALL good business owners possess, regardless of the organizational structure of their company?
• Is buying into a pre-existing, generally lower risk/higher profile business a personally acceptable tradeoff for the potential loss of control and/or input that’s often associated with a franchise business structure?

The bottom line is that a franchise owner is a unique blend of an individual that is both interested in running their own company and one that appreciates the value of input and expertise from those who have already gone through the process. Their contribution to the world of business, while no less special, isn’t based on their need to “reinvent the wheel” or to make a “better blue widget.” They’re as content to follow through on directions given to them from the franchise headquarters as they are to give guidance and orders to their employees. They truly enjoy being in the center of the franchise equation of business success.

Does that sound like you? If so, you might just have what it takes to be a successful franchise owner… as well as a happy one.

Each franchise business has been authorised by the parent company or franchisor, to sell their goods and/or services either in a retail space or a designated geographical area. The franchise governs the method of conducting business between the two parties. Generally, a franchisee sells goods or services supplied by the franchisor or that meet the franchisor’s quality standards. This relationship is regulated by the ACCC through the Trade Practices Franchising Codes of Conduct.

The popularity of the franchise business model has to do with its proven track record of success and ease in becoming a business owner. Independent, non-franchise businesses have a much higher likelihood of failure within their first year than franchises. One of the most compelling reasons is that, in a franchise operation, the franchisor provides business expertise (marketing and advertising plans, management guidance, financing assistance, site location, administrative support and training) that otherwise would not be available to businesses starting from scratch. Franchisees bring to the relationship entrepreneurial spirit and drive, which may not be enough to keep a business afloat if the franchisee lacks significant business acumen.

Franchising extends beyond the right to use a well-branded business name and sell a franchisor’s services or products. There are four main types of franchisin

1. Manufacturer-Retailer – Where a parent company grants the right to a franchisee to sell their products directly to the public (eg. New car dealerships).

2. Manufacturer-Wholesaler – The franchisee is granted rights under a licence to manufacture and distribute the franchisor’s product (eg. Coca-Cola).

These first 2 types are also known as Trade Name franchises, whether the franchisee is a retailer or Wholesaler the franchisor owns the right to the name or trademark and sells that right to a franchisee.

3. Wholesaler-Retailer – Where the retailer as franchisee purchases products for retail sale from a franchisor wholesaler (frequently a cooperative of the franchisee retailers who have formed a wholesaling company through which they are contractually obliged to purchase. (eg. Hardware and automotive product stores).

4. Retailer-Retailer – Where the franchisor markets a service, or a product, under a common name and standardised system, through a network of franchisees. Franchisors provide a full range of services, including site selection, training, product supply, marketing plans, and even assistance in obtaining financing.

This is commonly known as a business format franchise and is the fastest growing segment in franchising today.

HISTORY OF FRANCHISING

The word franchise is often traced back to an old French term ‘francis’ meaning ‘privilege’ or ‘freedom’, however franchise operations, as we know them, are not very old. The boom in franchising did not take place until after World War II. Nevertheless, the links to modem franchising date back to the Middle Ages when the Catholic Church made franchise-like agreements with tax collectors, who retained a percentage of the money they collected and turned the rest over to the church. The practice ended around 1562 but spread to other endeavors. For example, in 17th century inEnglandfranchisees were granted the right to sponsor markets and fairs or operate ferries.

There was little growth in franchising, though, until the mid-19th century when Isaac Singer, founder of the Singer Sewing Machine Company, developed it as a method of distribution under which independent salesmen paid fees to acquire exclusive territorial rights. The operation failed, though, because the company did not earn much money even though the machines sold well. The dealers, who had exclusive rights to their territories, absorbed most of the profits because of deep discounts. Some failed to push Singer products, so competitors were able to outsell the company. Under the existing contract, Singer could neither withdraw rights granted to franchisees nor send in its own salaried representatives. So, the company started repurchasing the rights it had sold. The experiment proved to be a failure. That may have been one of the first times a franchisor failed, but it was by no means the last. Fortunately, the Singer venture did not put an end to franchising.

One of the first successful American franchising operations was started by an enterprising druggist named John S. Pemberton. In 1886, he concocted a beverage comprising sugar, molasses, spices, and cocaine (which is no longer an ingredient). Pemberton licensed selected people to bottle and sell the drink, which is now known as Coca-Cola. His was one of the earliest—and most successful—franchising operations in theUnited States.

Franchising as we now know it today originated in theUSAin the 1950s with the emergence of fast food chains (McDonald’s, Pizza Hut and Kentucky Fried Chicken) but was not developed inAustraliauntil nearly two decades later in the early 1970s.

Ray Kroc, the founder of the highly successful McDonald’s hamburger chain and one of the world’s first business format franchisors, established his franchising operation in 1955, after obtaining exclusive franchise rights from Dick and Mac McDonald, who started the chain.

Today franchises exist in many categories; more than 95 percent of the franchise chains in existence today started operations in the last four decades. There is hardly a community anywhere that does not have at least one franchise operation, they exist in lawn, garden, and agricultural supplies and services, security services, tools and hardware, weight control & personal fitness, and many types of food products, including baked goods, donuts and pastry, ice cream, and fast foods. As the economy and consumers’ preferences change, technology advances, and new products are introduced, existing franchises will likely continue to grow, change, and innovate in response.

The growth of franchising can be traced to a variety of economic, demographic, and social factors these include the ageing of the huge baby boom generation, the surge of women entering the workforce, the growing number of active retirees & the emergence of two-income families

THE ADVANTAGES OF FRANCHISING

Franchising offers a number of advantages not only to franchisors but also to franchisees—which helps explain why franchising has been so successful. Franchisors benefit from these agreements because they allow companies to expand much more quickly than they could otherwise. A lack of funds and workers can cause a company to grow slowly. However, through franchising a company invests very little capital or labor, because the franchisee supplies both.

A company also can ensure it has competent and highly motivated owner/managers at each outlet through franchising. Since the owners are largely responsible for the success of their outlets, they will put a strong, constant effort to make sure their businesses run smoothly and prosper. In addition, companies are able to provide franchising rights to only qualified people.

Likewise, franchisees reap a variety of benefits from franchising. Franchisees face much less risk through purchasing a franchise, than through starting a business from scratch, according to many studies. The lower risk is related to other advantages of franchising that stem from being affiliated with a proven company or system. The franchisor generally has had some experience in the field of business and has national or state based name recognition. Franchisors also provide franchisees with a proven and efficient method of operation through their years in the business, with management assistance and training, and with marketing assistance and advantages. Franchisors usually conduct national or state marketing campaigns developed by professional advertising agencies and they can help franchisees run local ad campaigns, though franchisees generally must contribute 2-5 percent of their gross profit to advertising funds. All of these aspects of franchise agreements can significantly increase the chances of an outlet’s success.

One of the other benefits for franchisees is generally the buying power they receive by being part of a group rather than an independent business. As an example if I owned a Kev’s burger shop as an independent I would only have the bargaining power with suppliers from the turnover of my own store, but if my business was a franchised burger store like McDonalds I would benefit from the buying power of the rest of the franchise and company stores, so I would be able to remain competitive, maintain better margins or profitability and maybe have access to exclusive products.

Another advantage for franchisees is access to more customers by brand awareness, the often-instant recognition from customers is also a big plus. Customers are dealing with a “known” rather than an “unknown.” Think about it: If you are driving through a town you’ve never visited before and have the choice of a “Big Kev’s Fried Chicken” or a “KFC,” which one are you more likely to stop at? Until you know that Big Kev’s is THE place for fried chicken, you may not want to take the chance.

For the customer, the advantages of a franchise include the comfort of knowing what you’re getting. You know that the quality of the product or service at one location will be comparable to that of another location. You know what they have and you already know what you like about it.

These customers are known as transient customers and they move from location to location passing on their custom and loyalty to the brand that they have become familiar too and trust.

So having multiple locations can be a major positive especially to brand recognition and turnover although from my experience most franchisees would rather not have another franchise or company location close to there store, not having one near by could become a greater disadvantage especially if you leave room for a competitor to enter the market.

In most franchise systems the combination of buying power and the benefit of the brand, far out way the service costs or royalties charged by the franchisor. Additionally the franchisor also provides the franchisee with support, training & guidance throughout the business and even assisting training the new buyers when its time to sell the business. In most cases selling a franchise business is also easier, especially if the brand is well known. The value of a franchise business is often greater than an independent business as buyers will often pay for the brand equity that has been established within the franchised business.

Furthermore, franchise businesses are often easier for franchisees to obtain finance for their outlets as many banks provide funding against the strength of the franchise system especially if the franchisor is well established, rather than based on a new concept.

THE DISADVANTAGES OF FRANCHISING

The Rules: Fees

There are two groups involved in a franchise, the franchisor (the person or company leasing the rights to the business name and system) and the franchisee (the person who purchases it).

The right to the franchise is sold by the franchisor to the franchisee for an initial sum of money, often called the franchise fee. This money will be paid once the contract has been signed. The contract (franchise agreement) details the responsibilities of both the franchisor and the franchisee, and is usually for a specific length of time (typically five years). Once the contract expires, it must be renewed. Most franchise agreements provide a renewal period that is the same as the initial period.

This initial franchise fee doesn’t include anything except the rights to use the name and system, and sometimes training, procedures, manuals, and other assistance like site selection. It doesn’t include any of the necessary inventory, fixtures, furniture or real estate.

In addition to the franchise fee, the franchisee must pay the franchisor royalty fees, or other on-going payments. These payments are usually taken as a percentage of sales, but can also be set up as a fixed amount or on a sliding scale. The terms of these fees will be spelled out in the franchise agreement. These payments are for the on-going services and support that the franchisor provides. Franchisors may also sell supplies directly to their franchisees.

The first point to make about Royalties is that good Franchise systems should look at them not as a payment but rather as the Franchisor’s share of the income derived from customers or clients. The Franchisee collects that fee along with all other revenues from the customer.

It’s an important concept because it emphasizes that the customer ultimately pays for everything, including the Franchisor’s royalty, the Franchisee’s overhead, all costs of sales, employee’s salaries, and the Franchisee’s profit. Therefore it’s all about the customer – as it should be.

The Franchisee should want the Franchisor to earn a significant amount of royalties because that’s really the oil that makes the engine run. Each Franchisee collects and remits a small portion of that oil to the Franchisor. All elements of the system can continue to improve as long as the royalty stream is strong.

The Franchisor’s royalty will be based on the fact that they have provided a system and strategy that has ultimately served the customer. The Franchisee delivers that system to that customer. The royalty represents the Franchisor’s share based on the various parts of the Franchise system, which has four elements.

The four elements of a Franchise are:

a)     Brand
b)     Operating System
c)     Support System
d)     Franchisee

Brand – the name associated with the services delivered in a memorable and satisfying experience to the customer

Operating System – institutionalizes the excellent service delivered in a memorable experience so it can be done over and over again from Franchise to Franchise in a consistent manner.

Support System – helps the Franchisee get better and better at delivering the service in a memorable experience – helps a Franchisee improve their performance.

Franchisee – the individual motivations or reasons for being in a good system, as well as the talents and experience delivered to the business.

The Operating and Support systems will generally provide access to advice at the level of professional consultants in the fields of marketing, management, advertising, execution of the delivery of the product or service, customer support, etc. The cost of these types of consultants on the open market will often far exceed the value of the royalty fees that are remitted by the franchisee that participates in a system that delivers these items from a position of experience. In fact, it’s the exact experience the franchisee requires as opposed to open market advice.

Now here’s the test. If each of the four elements of a Franchise system is evaluated in terms of the percentage of contribution to the overall success of the business, then the royalty can be assessed in a proper light. Many people will say that each of the four elements contributes equally – or 25%, to the overall success. That means that the Brand, Operating System, and Support System provide 75% of the success formula. Therefore, as long as the royalty is less than 75%, it’s a good decision to participate in the system. That’s a little silly, but it emphasizes the point.

Most royalties range from 2% to 10% depending on the type of system, so as long as the Franchisor’s systems contribute 10% or more to the success of the business, it makes sense to participate, and remit the collection of royalties to the system.

Advertising funds are also paid periodically. These funds are usually put into a general account and used for national and regional promotion for the entire chain.

The Rules: Restrictive Covenants

The success of most franchises is based on the operating systems, methods, and products produced. For this reason, franchisors must protect their proprietary information and trade marks. In order to do this, they establish restrictive covenants for their franchisees. These covenants govern the things a franchisee can do.

For example, one restrictive covenant may state that the franchisee cannot operate another similar business that would compete with the franchised business during the term of the franchise agreement. These are called non-competition covenants. There may also be post-term non-competition covenants that prohibit the franchisee from operating a similar business even after the terms of the franchise have expired.

OTHER DISADVANTAGES. 

In addition to the payment of fees and royalties, franchisees give up some control over their own businesses, as well as lose their own identity. Most patrons do not know who owns their local McDonald’s, KFC or Pizza Hut. So, many franchise outlet owners are relegated to anonymity—which can be a drawback.

Franchisees are often subjected to tight supervision by the franchisor. They cannot pick out their own business name, buy products and services from whom they choose, or select the location at which they will do business. In addition, franchisees usually must follow franchisor guidelines closely and not deviate from their approach to doing business. Some franchisors control their outlets so tightly they even tell business operators how to dress their employees, what color to paint their walls, etc. As a result, some franchisees are largely dependent on their franchisors. Also, franchisees usually cannot implement changes without franchisor approval. Hence, if a coffee franchise that sells only beverages and pastries notices customer demand for sandwiches, it cannot offer them without the consent of the franchisor.

Another problem with franchising is that franchisees may fall victim to the company’s problems. While a particular business owner may be doing well, the franchise itself may encounter financial problems due to mismanagement, a failing economy, or any other reason which impacts operations. This can result in increased fees or royalties or a switch in suppliers which can lead to reduced quality of goods and services. In extreme cases, the franchisor can go out of business completely. Franchisees also enter into 5-15 year agreements with franchisors and in most cases can get out of the agreement only by selling the business.

A final problem for potential franchisees is how to select the right company. As the number of franchisors increase, the method of choosing which franchise is right for a particular individual becomes more complex. Obviously, if the would-be franchisee has certain skills or interests, these are likely to guide this choice. Even if a potential franchisee knows which type of business to enter, the selection of a franchisor may pose a challenge.

The person who wants to open a fast-food franchise has to decide what type of food it will serve: pizza, hamburgers, Hot-dogs etc. Other matters to consider include fees required, royalties, marketing costs and whether the particular business is part of a growing industry.

SELECTING THE RIGHT FRANCHISE

How do you select the business franchise that fits your needs, skills and desires best, while also making sure you’re joining a winning organisation? There are some steps to take to begin the weeding-out process. So put on your inspector’s hat and begin formulating a game plan.

First of all, think about the work environment you are interested in and the requirements that running businesses in various industries will have. For example, do you like working late (and long) hours, hiring and managing employees, and dealing with the public? If so, you could consider the food service industry. Think long and hard about what “fits” your lifestyle. Involve your family and any friends or associates you may want to pull into the business. Write down your objectives. Sometimes, just the act of writing things down helps you more clearly identify what you really want.

Once you have identified the general category of business you want enter into, visit some of the franchising Web sites, on most of these sites, you can search for franchises based on investment levels, type of business, and sometimes geographic region. Some even give you estimated breakdowns of what your total investments will be, as well as the ongoing royalty and advertising payments. You can also use a franchising consultant to help narrow down your choices.

When you get a list put together, begin contacting the franchisors for additional information. One thing to keep in mind throughout this process is that while you’re shopping for a franchise, those franchises are also out there shopping for franchisees. You’ll be interrogated as much as you interrogate them. You both have to agree that it’s a good match in order to proceed.

The role of the Franchisor

The Franchisor has built a successful business system and is willing to sell you the right to use that system, and all that goes with it, to begin your own business. An important distinction is that the franchisor is not selling you a business; he/she is selling you a right to operate a business using an established system.

The goal of the franchisor is the same as any other business owner; to increase the value of their business. In the franchise arena, this is accomplished by selling the right to use their business model so that there are more franchise locations doing business successfully. In this way they expand their market reach, increase the value of the franchise and the brand as a whole grows. As the number of successful units grows, the franchisor’s royalty stream (the percentage of profits they get from each unit) also grows.

It is in the franchisor’s best interest to continue to support you as you exercise this right to do business. Some of the things you can expect from a franchisor are:

Professional national marketing and advertising materials and campaigns: they are still the captain of the fleet and will manage the overall strategy of the brand, including management of products and services as well research and development of new products and services.

The role of the Franchisee

The franchisee is ready to start a new business, but may not have enough experience in running a business to be comfortable starting one from scratch. Most new businesses have a fairly high failure rate, sometimes due to mistakes made by inexperienced business owners, other times due to unexpected conditions in the market. What the Franchisee is looking for is a leg-up in starting a business so they have an increased chance of success. This is exactly what purchasing the right to use an existing business system and brand name provides them.

What you need to keep in mind is that this is your business, but someone else’s brand.  You are responsible for hiring and training all employees, but again, the Franchisor can provide helpful tips for recruiting and employee development. You manage all of the pieces of the business yourself, tapping into the expertise of those from whom you’ve purchased this system whenever you need advice. You can also expect the franchise to provide training in the methods of running your business according to the system they franchised to you.

You need to run your business according to their standards regarding products and services. Consistency from store to store is what brings customers into franchise businesses. A customer should expect to get the same product or service from that brand name regardless of which building they walk into. If you don’t, other units suffer.

It’s important to note that the services listed above are somewhat standard to all franchise systems, but the extent to which they are applied varies greatly. Your Franchise Agreement will explicitly state the levels of support you will get in terms of advertising, training, and other areas. If it isn’t in writing (in your Franchise Agreement) then it’s not required. Keep this in mind during your conversations with any franchise organization.

What is important for you as the Franchisee to understand from the beginning is that while you are part of an entire franchise system and will work as a partnership, you are not actually a partner. This doesn’t mean that you have no say in how the business is run, but it does mean that your say is limited. In more established franchises, there is usually a franchise advisory council (FAC) that represents the franchisees interests and works with the franchisor to present ideas and resolve business issues to the benefit of the franchise as a whole.

The Relationship between Franchisor and Franchisee

Often a parent-child analogy is used to describe the relationship between a franchisor and franchisee. Yes, the franchisor teaches the franchisee how to operate according to the system and yes, the franchisor assists the franchisee in growing their business and yes, the franchisor establishes many of the rules and boundaries for operating the business. But, franchisees are not children. They have made a business decision to purchase the franchise and have voluntarily agreed to operate the business according to the rules and boundaries set forth by the franchisor. They are responsible for the activities of the business and its failure and success are typically their responsibility.

Potential franchisees are provided information about the franchise prior to their making the decision to become a franchisee. They have ample opportunity to review the documents and to seek professional (legal, accounting, etc.) opinions regarding both the viability of the business concept and the terms of the franchise agreement. If their investigation of the opportunity leads them to believe that it is not “right” for them, they are free to look at other franchises – or to start their own business.

If they choose to become a franchisee and later decide that it was the wrong decision, most franchise agreements allow them to sell their business.

By and large franchisors want their franchisees to succeed and most work hard to provide their franchisees with the tools and coaching they need to be successful. However, franchisees are independent business people and they make many business decisions that ultimately can determine the success or failure of their business.

At least in our families the parents for many years have responsibilities to guide their children daily on almost every step of their lives. The child is protected from their mistakes and Mum and Dad make things right when things go wrong. That’s not franchising.

Franchisees are independent business people and are in significant control over their destiny from day one. Depending on circumstances they sometimes fail. In most families, when a child is failing parents do everything they can – often putting everything they own at risk – to save their child. That is not the case in franchising. While a franchisor can be supportive and provide guidance, they do not have the right to risk everything they own to save the franchisee. They do not manage the franchisee’s business and cannot put the system at risk as a parent would for their children.

Individuals from successful franchising brands VIP Home Services, Gametraders and Group7 Franchising have presented a unified front in saying the bill should at least be the subject of a Parliamentary Committee.

Mark Langford, franchisor of Gametraders and South Australian State President of the Franchise Council of Australia, says the bill will likely stop him from developing further businesses in South Australia.

“As a franchisor based in South Australia I would most probably halt any further expansion if this bill were to proceed in its current form, which includes, as far as I am concerned, de-facto state-based franchising legislation,” he says.

“I have no problem with a small business commissioner based on the successful Victorian model but we do not need state-based franchising legislation in South Australia when we already have federal legislation under the Competition and Consumer Act – Franchising Code of Conduct.

“The Labor party needs to understand that the Small Business Commissioner Bill 2011 in its present form is a detriment to franchising. I am very concerned that many interstate and SA-based franchisors will cease to expand in South Australia due to the risk factor of a commissioner who will have extraordinary powers which could place an entire franchise system including their franchisees at risk.”

Bill Vis, founder of VIP Home Services say the bill in its current form would alter his thinking about using South Australia as a base for head office.

“I believe there needs to be federal laws around franchising and not local ones as it makes it too awkward as you have different rules in different places. We would have to strongly consider moving our head office to another state should this bill proceed in its current form,” Mr Vis says.

Paul Wheeler from Group7 Franchising says he is disappointed that the South Australian Government had already altered the original bill without further public consultation.

“What was originally put out for comment is vastly different to what we now see before Parliament. This should definitely be put back out to the community for their opinion before any vote is conducted in the Upper House. At the very least it should be debated by Committee,” Mr Wheeler says.

Franchise Council of Australia Executive Director Steve Wright says he looks forward to the bill being debated further so at the very least there can be amendments made to it so it is more in line with the Victorian Small Business Commissioner model as it was first purported to be.

“If it goes ahead with amendment, it would mean franchises under the same brand could be governed under different rules, which is a step away from the over-arching philosophy of franchising which is consistency across the playing field,” Mr Wright says.

In figures published by the Victorian Small Business Commissioner (VSBC) disputes between landlords and tenants dominated enquiries. The report shows that of the 1,553 matters dealt with, about 70%, or 1,087, related to retail leasing disputes, such as rental increases, non-payment of rent, the state of premises at the end of a lease and minimum exclusivity periods for renewing leases.

The figures are a dramatic increase on the 2009-2010 year, where 995 retail tenancy matters were submitted.

FCA Chairman Stephen Giles says the report shows $10 million in funding has been provided for the next four years, or $2.5 million per annum.

“The VSBC focuses primarily on dispute resolution and providing business assistance. The SA Small Business Commissioner Bill proposes a substantially expanded role, with investigative, compliance monitoring and prosecution activities added. Accordingly, the SA Government could presumably expect to pay much more than $2.5 million per year,” he says.

Looking at the Victorian figures, and considering the estimates made by the Western Australian parliamentary committee considering the Abetz Private Member’s Bill, Mr Giles conservatively estimates the annual cost of the South Australian Bill at $20 million over four years.

“If you assume 1,000 disputes in SA of which 200 require some investigation and 100 some form of prosecution, you can get to $20 million without even blinking,” he says.

“If the average cost per complaint in Victoria is $1,600, and Victoria is primarily involved in mediated dispute resolution, you would have to at least treble that average cost estimate for South Australia given the extra functions and resources required.

“The SA Bill in its current form makes no reference to retail tenancies, with the purported initial focus intended to be on farming and franchising.

“Yet experience shows these areas generate statistically few disputes, and around 70% of complaints will come from retail tenancy. None of the proposed fines can apply to retail tenancy unless a new State retail tenancies code is introduced, which is unlikely given retail tenancy law is already regulated at State level. So there is no real potential for cost recovery.

“This VSBC report shows the South Australian Bill has not been properly thought through or costed.

“The extension of the South Australian Bill beyond the scope of the Victorian model will add massive and unnecessary cost. The Victorian statistics provide a timely reminder of the cost of regulation even when that occurs efficiently and in a minimalist way. I doubt the SA Government would have any idea that they should expect perhaps 1,000 matters a year, so the cost blow out could be massive.”