Franchising is a big part of Australian business. According to a Consultation Paper released by the Australian Government last week, the sector generates an annual turnover of $131 billion, with 73,000 franchises operating throughout Australia. An earlier Report commissioned by the Government and released on 30 April 2013, identified that the sector employs around 413,500 people.
It’s a common myth that franchises are less-risky business ventures than going out on your own. Of course there are benefits in linking your new business with a well-established and reputable chain. These benefits might include brand recognition, a well-developed operating system, a wide and well-resourced support network and collaborative marketing strategies.
However, buying into a franchise must be approached in the same way and with the same level of caution that you would exercise in starting up any other business. It is a significant personal undertaking that can have long-standing consequences for your finances, work-life, family life and social life. In a research report titled “Survival of the fittest: The performance of franchised versus independent small business during economic uncertainty and recovery” researchers from Griffith University examined some of the key differences between franchisees that have survived in their business and those that haven’t. The report gives a good insight into some of the indicators that set the survivors apart from the rest.
So it’s particularly important that before you make the decision to sign up, you have taken your time and done your homework.
Homework, you say?
Yes, homework. You need to become a student of the franchise and learn all there is to know about the business.
If you are buying into a franchise, you need to recognise that while the franchisor might be there to help and support you in getting the business up and running, during the early contractual stage you are sitting at opposite sides of the negotiating table. Franchisors are often large, established commercial businesses that are managed by people that have years of experience. This means that you may be at a significant disadvantage if you are relatively inexperienced and have not had the benefit of proper professional advice.
If you express an interest in joining a franchise, often the franchisor will present you with a ‘Franchisee Pack’ containing a frightfully thick stack of paperwork to consider. Signing up to join a franchise will require you to read, understand and agree to many terms and conditions that may significantly impact on your everyday life as a franchisee.
So, before you spend precious time and energy digesting the inevitable mountain of paperwork, you first need to set yourself some relatively simple homework tasks to make sure that this particular franchise really is something you want to be a part of.
If you’re not sure where to start, here are 5 simple homework tasks that should be completed before you even call the franchisor to get a copy of their Franchisee Pack.
Your Homework Tasks
1. Back to School Time
The Australian Competition & Consumer Commission (ACCC) has partnered with the Asia-Pacific Centre for Franchising Excellence (part of the Griffith University Business School) to provide an online program called “Buying a Franchise” . The program can be downloaded for free and offers an introduction to franchising for people just like yourself. There are 5 educational modules that you can download and complete in your own time. The modules cover topics such as:
- Advantages & Disadvantages of Franchising;
- The Franchising Code of Conduct;
- An introduction to Franchise Disclosure, the Franchise Agreement and Franchise Fees & Royalties;
- The Role of the ACCC and other Regulatory Bodies; and
- Assessing your Suitability as a Franchisee.
This is a good basic resource to help you get ‘schooled up’ on the world of franchising, so it’s worth downloading.
2. Get Googling
The internet can provide a treasure trove of free information and intelligence. This is the same treasure trove that your potential customers will be accessing, so get googling.
Put yourself in the shoes of a potential customer. What happens when you search for the franchise on the internet? Are you happy with what you find? Or are you faced with a mob of disgruntled forum participants complaining about poor products & services? Or a barrage of turbulent tweets? Or perhaps a map showing a heap of similar stores in more convenient locations to your potential store?
What about when you search for the directors/ managers that operate the franchise? Do their credentials seem to stack up?
3. Tour de Franchise
We’ve all heard of the ‘grand tour’ and perhaps even the ‘pub-crawl’. Whatever your style, it’s time to take a little tour (or crawl) of your own. To keep it classy, and in the spirit of the sporting season, let’s call it ‘le Tour de Franchise’. The purpose of the Tour is to observe the franchise in action at numerous locations and to ask yourself:
- Was the business well-advertised and easy to find?
- What level of service do you get?
- Are the products of a high standard?
- Do the staff seem happy and helpful?
- Was the store/office/salesperson tidy and presentable?
- Would you recommend your experience at the store to your family & friends?
- Would you want your business to be associated with this business?
4. Time for Some Yarn Bombing
No, not of the knitted variety that seems to be appearing all over the place, I mean the verbal variety. Go and have a yarn to current and former franchisees. Ask them questions like:
- What is involved in their day-to-day running of the business?
- Do they feel like they get enough support from the franchisor?
- What is the biggest challenge that they have faced as a franchisee?
- Has the franchise lived up to their expectations? If not, why not?
- Are they happy with the marketing strategies that have been adopted by the franchisor?
- How long did it take them to make their business profitable?
5. Crunch the Numbers
Without more information, you might not yet be able to do this with complete accuracy, but it’s time to get out your calculator and crunch some numbers.
Taking a fast food chain as an example, how many burgers would you need to sell on average per month, per week, per day to cover your expenses (such as rent, wages, stock, fit-out, electricity, franchise fees etc.) before you will make a profit? How much profit do you need to make to meet your personal financial commitments & goals? How many burgers does that translate to?
Based on your observations during le Tour de Franchise and of your proposed store location, do you think it is realistic to expect that you will sell that many burgers? If the numbers don’t seem to add up at this stage, you need to think very carefully before you proceed any further.
If, after completing these 5 simple tasks you are still interested in joining your chosen franchise, then by all means make some initial inquiries with the franchisor and perhaps ask for a copy of the Franchisee Pack.
Just a little word of caution before you do:
- The franchisor will most likely require you to return the Franchisee Pack intact to them if you decide not to proceed with the franchise;
- You will most likely be prohibited from making any copies of the documents in the Franchisee Pack if you decide not to proceed;
- You might be asked to sign some form of ‘confidentiality agreement’ before the franchisor agrees to release certain documents in the Franchisee Pack to you. Make sure that this does not prevent you from showing the documents to your professional advisers such as your accountant, financial adviser and lawyer;
- Before you order a Franchisee Pack, make sure you ask whether the franchisor will require you to reimburse it for any expenses it incurs in compiling the documents in the event that you decide not to proceed with the franchise. If yes, how much?
Got the Documents?
It’s time to roll up your sleeves and get ready to start reading. Importantly, don’t sign anything until you have had the benefit of specific accounting, financial and legal advice.
Stay tuned for a later blog when we will discuss some of the big issues that you need to consider when reading through the franchise documents.
For further information, please contact the author.
This article is posted in Adelaide, South Australia by Tri-meridian Corporate & Commercial Law and is intended to be used as a guide only. It is not, and is not intended to be, advice on any specific matter. We do not accept responsibility for any acts or omissions resulting from reliance upon the content of this article. Before acting on the basis of any material in this article, we recommend that you consult your professional adviser.