As a rule of thumb, I recommend that a first-time potential franchisee be prepared to spend at least one hour of research for each thousand dollars they are looking to invest in a business.
Franchising continues to appeal to existing Australians who are looking to become self-employed, as well as new arrivals who qualify for business migration visas as a method of obtaining entry into Australia.
However to buy and operate a successful franchise requires more than just having the cash to pay for it. Potential franchisees must be prepared to do some hard work to research and understand the business, the franchisor, and themselves in order to make the best possible decision.
And here is the first hurdle:
A potential franchisee must be prepared to roll up their sleeves and put some real time and effort (as well as some money via personal development and professional advice) into their franchise search.
If not, they greatly increase their chances of picking the wrong franchise, and losing part or all of their investment.
To increase the chances of picking the right franchise, here are some key pointers:
What should I look out for?
This boils down to three key things: Profitability. Sustainability and strong, competent Leadership. In good times, tough times, or anytime, these three criteria remain the same.
Of course it’s rare that a franchisor will make representations about profitability or concede that their business is anything less than sustainable. It is rarer still that a franchisor would claim to have anything less than strong, competent leadership, so these concepts all need to be tested by a potential franchisee’s own research. If a potential franchise buyer is not prepared to invest the time to properly research what they are buying, then they must accept some or all of the responsibility if the investment fails.
How much time should I spend researching a franchise?
As a rule of thumb, I recommend that a first-time potential franchisee be prepared to spend at least one hour of research for each thousand dollars they are looking to invest in a business.
For example, if a franchise costs $250,000, this amounts to up to 250 hours of research.
That might sound like a lot, but the saying that a fool and his money is easily parted might have been created specifically for those people who recklessly invest after making hasty, ill-considered decisions.
Most franchises offered at $250,000 and above will be retail businesses, so prior knowledge and experience in retailing may be useful and should be included as part of any pre-purchase research.
What sort of research should I do?
Such research might include (but not be limited to):
- Start your search for a franchise by visiting one of the upcoming franchise expos held each year in Australia Sydney, Brisbane, Melbourne and Perth, as well as look at franchise opportunities online;
- Once you have shortlisted one or more franchise systems, carefully read through the information provided by the franchisor. You should also engage an experienced franchising lawyer and accountant, and read the documents for yourself as well as get professional advice.
(Many franchisees fail to read their franchise contracts, and then afterwards discover they have signed for something that they didn’t know about or wouldn’t otherwise agree with. Reading the documentation for themselves will also help potential franchisees understand the advice they are being given, and to ask more informed questions of their advisors and the franchisor.) - You should contact current franchisees in the system (or at least as many as possible) to ask them about their satisfaction with the franchise, the lessons they’ve learned along the way, and the sort of research they did (or wished they had done) before buying the franchise. The list of current franchisees and their contact details will be included in the franchisor’s disclosure document, however this document may only be available at a relatively advanced stage of negotiations with the franchisor, and in the meantime, franchisees’ details or locations may also be available on the franchisor’s website and in the telephone directory.
- You should also contact the former franchisees who have left the system in the last three years. Franchisors must provide a list of these franchisees and their contact details (where known) in the disclosure document. By contacting former franchisees, you will have an understanding of their satisfaction with the business and their reasons for exiting. Again it is important to contact as many as possible of the names provided. Calling just one or two is likely to provide a distorted positive or negative view of the system, and only after contacting the full list can a potential franchisee develop a balanced view of the satisfaction of former franchisees and why they left.
- Compare concepts. There is usually more than one franchise concept servicing a market niche (however unique], so check out the value of the competing offer. Even if the initial investment price is the same, similar franchises may have radically different fee structures, marketing levies, support systems, purchasing or other arrangements that can radically affect the long-term value and profitability of the business, or satisfaction of the franchisee.
- Verify for yourself any statements or representations made by the franchisor, or issues raised when contacting current and former franchisees. This might include even spending time doing market research such as counting houses in a territory, searching Australian Bureau of Statistics and other sources of data, counting vehicle or pedestrian traffic and directionality outside a potential shopfront, or many other things. While this may sound tedious, it’s all part of ensuring that the facts being used to make the decision to buy the business are the right facts;
- Consider if you should work part or full time for a period in a franchised store or territory to get a genuine feel for the business (in which case, the longer the better, and the one hour per $1,000 invested rule can be extended). People who have worked in franchises before buying them increase their operational proficiency and become culturally acclimatised to the organisation, thus reducing the likelihood of a horrible “I wished I’d known this before” moment after the investment has been made.
- Undertake small business and franchise training courses and workshops. People going into self-employment forthe first time don’t know what they don’t know and look to the franchisor to fill this void for them. This creates the opportunity for unscrupulous franchisors to abuse their trust, or for the franchisee to develop unrealistically high expectations of the system for which the franchisor cannot deliver.
Understanding basic principles of franchising, as well as basic business concepts and financial literacy are essential to improving and maximising the long-term value of any franchise investment. (The Franchise Advisory Centre (www.franchiseadvice.com.au) hold a number of workshops, seminars and short courses, as well as various state and federal bodies, and business/industry associations.
What are the best franchises in the current economic climate?
Established systems with a critical mass of profitable, satisfied franchisees will not only weather the current economic storm, they will come out the other side in top gear and quite possibly buy out or take market share from a competitor or two along the way. Furthermore, these systems will need to have dynamic and talented leadership teams, strong corporate governance, and enduring customer appeal.
Having said that, concepts such as “established”, “critical mass”, “satisfied”, “dynamic”, “talented”, “corporate governance”, and “enduring appeal” are subjectively assessed, and relative to the eye of the beholder. An evaluation of a system on these criteria might produce different outcomes for different people.
Cash businesses (or those with tight credit controls) combined with clever marketing and exceptional levels of customer service (and there are many examples of these in both service and retail franchise brands) that fit the above criteria will perform strongly in the next couple of years.
What about new franchises?
There is opportunity in adversity for any entrepreneur. New franchise concepts emerge in Australia at the rate of about 100 per year, however not all of these will be viable in the long run.
There may be more risk associated with investing in a new franchise system with just a handful of franchisees, compared to larger and more-established brands, however there may also be more flexibility and growth opportunities for franchisees of new systems. It is also possible that the franchisor’s training, field support and marketing assistance for new franchisees may not be as well-developed in new systems compared to established systems.
What should I be wary of?
The recently-unemployed, particularly those with sizeable payouts for years of accumulated service, holiday pay, etc, are prey for unscrupulous operators. In particular, advertisements that claim a business is a “license, not a franchise”, or which include income guarantees or similar offers should be approached with caution.
It is essential that business migrants, some of whom will not have been in business for themselves before, may well make excellent franchisees. However their potential naïveté makes them particularly vulnerable to poorly-considered decisions, hastened by unnecessarily eager franchise salesmen.
Migrant franchisees should also be wary of offers to buy multiple outlets at the same time, or master franchises. It will be difficult enough in most cases to learn how to operate just one business, without compounding the challenge across many businesses.
The key lesson here is to undertake proper research. (See research hints above).
What laws exist to protect franchisees?
It is also worth noting that although the last recession occurred before the Franchising Code of Conduct was introduced (ie. the laws that regulate the franchise sector], there is no amount of legislation that can adequately protect a franchisee from a hasty, unresearched and ill-considered investment decision.
Distributorships and licensed business opportunities are often advertised alongside franchises, but look, sound and feel the same as a franchise. No matter what they call themselves, if they meet the four criteria in the Franchising Code, then they are a franchise.
This entitles potential franchisees to receive a disclosure document (containing a variety of important information as well as the lists of current and former franchisees critical for proper research], as well as a mandatory cooling-off period, recourse to mediation in the event of a dispute and all the other protections available to franchisees under the Franchising Code of Conduct.
The best way to distinguish between a legitimate franchise offering and something that is designed to separate an aspiring business owner from their cash is to educate yourself, and do your research. Only then can you make a balanced decision that takes into account your long-term interests.
Where do I go for help?
Visit the Franchise Council of Australia’s website at www.franchise.org.au to see if the franchise that interests you is a member. Membership of the Franchise Council means that franchisors have agreed to an even higher standard of conduct than the minimum required under the Franchising Code of Conduct.
Also visit the Franchise Advisory Centre website at www.franchiseadvice.com.au for many free articles on what you should know before buying a franchise.
Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 30 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.