Buying a franchise has been a very rewarding experience for tens of thousands of Australians.
Like any major investment, you should be totally thorough in your planning and preparation before satisfying yourself that this is the right path for you to follow. Too many failed franchises are blamed on “franchising” and the franchisor, when better planning would have avoided potential failure.
If you plan to purchase a franchise, you’re going to have to take a good look at many things.
You need to assess yourself, your family, your resources, your advisers, the franchisor, the product or service, the franchise agreement and territory/location.
You also need to assess the future – your own, your franchisor’s, the economy and trends in society generally to see where you might be in five years.
Assess your personal situation:
Why are you considering purchasing a franchise?
- You want to quit your job;
- You want your own business with a support system;
- It’s a way of beating unemployment;
- You’ve been given a lump sum payment; and/or
- You believe in franchising?
Those who ultimately succeed acted on sensible business reasons, not primarily on personal or “lifestyle” reasons.
Is this really how you’d like to spend at least the next five years?
You could alternatively:
- Be an employee – maybe a retiree;
- Look for a new career;
- Start an independent business; or
- Check out government grants.
Buying a franchise is a serious commitment. Although less risky (statistically) than small business, it is still a major investment decision.
Does your family support your decision to buy a franchise – this franchise?
- Your spouse as business partner;
- Providing an employee base for family members; or
- No imbalance in family politics that you can’t withstand or reconcile if things don’t work out?
The majority of franchise outlets are run – to some extent – as family businesses.
WHAT IS YOUR FINANCIAL STANDING?
What are your avenues for funding?
- You’re cashed up;
- Mortgage the family home;
- Some other family funding;
- Bank; or
- Other source of institutional funding?
Check out all the banks -they are constantly upgrading their services to franchising.
How much will it cost to purchase the franchise and operate it until your income equals your expenses?
ARE YOU GETTING THE BEST ADVICE?
What is your starting place in seeking a franchise?
- Franchise publications, books and magazines;
- Franchise expos;
- The banks’ publications; or
- Office of small business?
Start with broad information sources – expos are a good place to start because each exhibitor is under the scrutinising eyes of peers.
What is your general understanding of running a business?
- No knowledge;
- Little knowledge;
- TAFE or other course;
- University degree; or
- Previous experience?
Experience is the most worthwhile source of knowledge, though it is not always advantageous when starting a franchise. Ideally the franchisor teaches you all you need to know.
What professional advice are you seeking?
- Legal advice;
- Franchise specific and/or
You must also ask yourself the following questions:
- Has your lawyer approved the franchise contract?
- Is your accountant or adviser satisfied with the figures?
- Have you sought advice from specialist franchise consultants, who can generally advise on all these issues?
WHICH FRANCHISOR SUITS YOU?
What is attractive about this franchise?
- Is the name well known?
- Do you like the concept?
- Is it a ready-made business with full training?
- Does the franchisor give plenty of support?
- Do you feel comfortable with the franchisor?
- Is return on investment realistic?
- Is the business formula proven?
What can the franchisor do for you that you can’t do for yourself? You must be comfortable with the type of business.
How much experience and success has your franchisor enjoyed?
- How long has the franchise been around?
- Is the idea imported? Has it succeeded overseas?
- How many other outlets are there? More is better.
Is the franchisor a one-person operation or an experienced corporation? Remember: Risk Equals Reward.
Who are the franchisor’s directors and officers?
- What is the franchisor’s financial condition?
- Have you seen a disclosure document?
- What is the franchisor’s total personal investment?
Ask yourself what you can find out about the franchisor’s business background, then find out everything you can.
WILL THE PRODUCT OR SERVICE SUCCEED?
Is such a product or service growing in the market place?
- What is the public’s general opinion of the sector?
- Is the national press reporting growth?
You need a product or service with a healthy life span – neither a craze nor a fad. Your best bet is a sector with a long future.
What innovations has the franchisor introduced most recently?
- Is the product patented or protected by trademarks or copyright?
- Is the franchisor a one-trick pony, or a consistent innovator?
Is the franchisor consistently upgrading – or is this all you get? If so – is it enough for the future?
How strong are your potential competitors?
Have you studied whether or not the product or service that you intend to sell has a market in your territory at the prices you will be charging?
One advantage of joining a franchise is that you get an established brand to put you ahead of your competitor. How established is this brand?
HOW IS THE FRANCHISE AGREEMENT STRUCTURED?
What exactly are the formal obligations of the franchisor as defined by the franchise agreement?
- Renewal rights
- Territorial protection
- Tied-purchase arrangements
- Common advertising fund
You must find out under what circumstances can the franchisor terminate the Agreement and how?
Does the Agreement satisfy you in all areas?
- Parties involved;
- Site and necessary construction;
- Exclusive territory;
- Terms and renewal conditions;
- Breach and termination of contract;
- Upfront fees;
- Continuing royalty;
- Ad levy;
- Purchases by franchisees;
- Training; and
Also check your ability to assign or sell the franchise to an outside party. Do you understand every clause in the Agreement?
Will this location/territory work for me?
- What assistance does your franchisor give with local promotions?
- Is the territory exclusive?
- What will you be given in start-up assistance?
- Will the outlet be a running as a profitable business from week one? Or will you have to build hard – if so, what support does the franchisor give?
What can you find out about the locality?
- Australian Bureau of Statistics (ABS);
- Market research;
- Local council data;
- Regional newspapers; and
- Personal observation.
Ensure that your new enterprise suits the present and future demographics of your locality. The ABS is the most authoritative source.
WHAT ABOUT THE OTHER FRANCHISEES?
What contact have you made with other franchisees prior to the purchase?
- Franchisees selected by the franchisor; or
- Free and open access?
The names of every franchisee in the system is included in the Disclosure Document. They are your best source of information. They can advise as to what to expect as a franchisee. However, be sure to recognise recognise that in all systems, there will be some franchisees who may be unhappy. In researching a franchise opportunity, it is therefore best to talk to several to get a cross section of views.
How do you relate to the “company culture”?
- Do you identify with what’s going on?
- Can you see a future for yourself in the franchise activities?
- Do you feel comfortable?
Are the other franchisees “your type of people?” They need to be!
They will be your closest business siblings.
Do the other franchisees have similar goals to you?
What do the other franchisees think about the franchise concept – and where do they want to take it? Can you identify closely with their goals?
Each franchisee is a link in the chain. Your chances of winning largely depends on whether they are winners too.
WHAT DO YOU GET FOR YOUR MONEY?
What does your franchisor offer that you can’t do or get for yourself?
- Specialised equipment;
- Administration aids (product labels, logo, forms etc);
- Point of Sale material;
- National advertising program;
- On-going training programs;
- IT Support; and/or
- Uniform and image?
The franchisor’s promise is to give you both an established brand name and an established business. Will it work?
Just how good is the product or service?
Exactly what is your franchisor good at?
- Product or service;
- Marketing; and/or
- Picking the trends and Purchasing?
A great product or service is only part of the promise. Eventually that product or service will be superseded – whatever it is, you want a franchisor that is up with the times.
Does the franchisor communicate well on an ongoing basis?
- Newsletter – Internet – Regular meetings;
- Annual meetings – Avenues for franchise feedback;
- Field visit – Help when you need it; and/or
- Franchise Advisory Council?
You want to stay close to the action in your franchise system.
Are the avenues of support present and established?
WHAT ABOUT THE FUTURE?
What are your franchisor’s future plans?
- Sell out?
Are you prepared to spend much of the remainder of your business life with this franchisor or is this a stepping stone? How?
What dispute resolution facilities are in place?
- Franchise Advisory Council?
- Mediation process?
Find out the mechanisms that are in place should a dispute arise. Avoid court at all costs! Consider such potential problems before signing.
How do you see this franchise purchase fitting into your personal plan?
- Build it up, gain more stores or territories?
- Sell it in 3 – 5 years?
- Upgrade within the franchise network?
- A stepping-stone to your own business initiative?
Your franchise is something you must live with daily. It must therefore make sense in terms of what you want to do with the next few years of your life.
As you can see, the information you need to obtain covers the following four important aspects:
- Your suitability to be a franchisee;
- The credibility of your franchisor;
- The business itself; and
- The fairness of the deal.
If you are healthy in all areas, chances are you will probably succeed in your venture into franchising!
Bill Lockett is a Sydney-based Franchising Consultant and Partner of Franchise Systems Group. With decades of retail and business experience behind him, Bill knows what makes a successful franchise. For further information about franchising visit www.franchisesystems.com.au or contact Bill directly on 1300 658 311 or via email at email@example.com.