10 things you need to know before

you buy a franchise

Going into business is a risk. For anyone
looking to build their future out of business
ownership its important to recognise that
investment does not necessarily yield the
expected returns. Even before potential
franchisees prepare to commit savings and
bank loans to their business venture it is worth
evaluating just how much they can afford to
lose because it just might happen. There
are no guarantees. This isnt a phenomenon
specic to franchising, it is mirrored across the
business community. Individual businesses,
franchises, and large corporations are all
engaged in risk. Its up to the franchisee in
this instance to decide if the level of risk is
acceptable.
There are examples of franchisees working
less than they used to as employees and
earning more, but they are a minority. For most
franchisees the reality of the investment is that
hard work is going to build the business. This is
particularly true at the start of the franchisees
business; whether the venture is as a sole
trader or running a retail store with staff, being
the franchisee means doing whatever it takes
to get customers, keep them, and grow the
business.
There are no guarantees Running a franchise is hard
work 1 2
One of the best ways to nd out what its
like to be a franchisee is to ask. Franchisors
are required to provide a list of both current
and past franchisees who have agreed to
be contacted, and these franchisees or ex-
franchisees can offer insights into the workings
of the business, how well the franchisor
responds to issues, whether there are any
hidden costs, how effective the training and so
on.
Sometimes franchisees come unstuck when
they dont understand just how much work
it entails to run a business, but at the same
time expect the franchisor to step in and ll
the void. Franchising works when both parties
in the agreement understand their roles and
responsibilities, and are committed to building
the business.
The franchisor brings to the table a business
model that has been tried and tested, training,
some form of support, marketing and of course
a brand. Franchisees pay for these through
initial and ongoing fees which also contribute to
the brands development and the growth of the
network. In return they are required to comply
with the franchisors rules and guidelines and
follow the operations manual.
When franchisors quote investment costs the
information will vary. Some provide turnkey
costs, so a franchisee knows what it will take
to open up their business, others dont include
vehicle leasing or shoptting costs for instance.
It is imperative for any franchisee to understand
any hidden costs that they will need to pay
there might be legal fees for both parties,
for instance, that fall to the franchisee. Retail
based franchises require equipment updates,
refurbishments, perhaps new uniforms.
An accountant, particularly one experienced
in franchising, can help evaluate the nancial
side of the franchise but its critical that the
prospective franchisee really understands the
numbers involved.
Transparency is key here potential franchisees
will best be served by honesty in their number
crunching and asking questions.
One of the great benets of franchising is the
training that new franchisees get before they
start their business. No independent business
has this advantage. The training can be focused
on operations and running the business on
the frontline, and on developing and building
the business. Its worthwhile assessing if the
training on offer will suit your requirements and
ll in the skill gaps.
Support can vary from all-hours phone advice,
call centre channelling leads, handling back
ofce invoices and admin to assistance with
location selection [see below] and rental
negotiation.
Franchising is a partnership Understanding the nancials
isnt just for accountants
4 3
Use other franchisees Franchisees get training and
support 6 5
Conducting due diligence on the franchise and
its operations is a vital step before signing an
agreement. Franchisees are best served by
doing their own comprehensive research on
the franchise brand, the directors running the
business, competitive opportunities, possible
locations and local demographics. Expert
advice on legal and nancial matters is essential
too, but a franchisee will gain more condence
and be sure of the investment opportunity if
they conduct vigorous due diligence.
Potential franchisees need to get themselves
off to the best start they can in business and
this means ensuring the agreement they sign
is fair and reasonable, which is something an
experienced franchise lawyer can evaluate.
The Australian Competition and Consumer
Commission regulates the Franchising Code
of Conduct, which comes under the Trade
Practices Act. This Code has been regularly
updated as a result of constant governmental
reviews and the latest change will give
franchisees a little more power. Under the Code
there are strict guidelines governing information,
the processes for purchasing a franchise, the
renewal or non-renewal of an agreement, and
the conduct of both parties in between.
Seeking good advice can be costly, but then
so is losing a business. Its worth committing
funds to third party guidance before signing any
agreement.
Almost without exception franchisees will sign
an agreement to operate their franchise for a
set period of time. After this they may or may
not have the option to renew for another term.
Quite often franchisors explain their franchise
terms as an equation ie 15 years (5+5+5). This
means the franchisee signs up to the rst ve
years, the next two ve year slots are optional
this is dependent on the franchisors willingness
to renew the contract and the franchisees
performance.
How do franchisees plan to make their money
and how will they move on from the business?
These are essential questions for any potential
franchisee to consider even before signing on
to a new business. Franchisees need to review
whether the best way to achieve a return on
their investment is through capital gain when
the business is sold, or accruing prot through
the lifespan of the franchise. This will depend
on individual circumstances, the cost of the
business and whether there is potential for
growth for the next buyer.
An exit strategy helps to underpin and give
shape to the business plan.
Franchising is governed by a
Code of Conduct 8
Do due diligence
7
Renewal of an agreement is
optional 9
Franchisees need exit
plans 10
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About Franchising magazine
Franchising magazine is the consumer
publication for anyone interested in investing
in a franchise. Franchising magazine is
Australias most trusted magazine dedicated
to the potential franchisee. This publication
was established in 1987 and is part of the
Cirrus Media portfolio.
About the Author
Sarah Stowe
Editor, Franchising
Sarah Stowe is the editor of Franchising magazine, Australias most trusted
magazine dedicated to the potential franchisee. She is also responsible
for all editorial content at franchise.net.au, FranchiseBusiness.com.au and
Franchising social media sites.