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Franchising is more than a financial partnership. It’s about people and their relationships, their reputations, the way they deal with each other and their perception of what is the long-term value of the system to the participants, whether they are the owners of the brand or the franchisee.

Franchise family ties hold up in downturn (PDF)

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;
• Brokers;
• 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;
• Accounting;
• Franchise specific and/or
• Other?

You must also ask yourself the following questions:

1. Has your lawyer approved the franchise contract?
2. Is your accountant or adviser satisfied with the figures?
3. 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?

1. Parties involved;
2. Site and necessary construction;
3. Exclusive territory;
4. Terms and renewal conditions;
5. Breach and termination of contract;
6. Upfront fees;
7. Continuing royalty;
8. Ad levy;
9. Purchases by franchisees;
10. Training; and
11. Trademarks.

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?

• None;
• 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?

• Expansion?
• Diversification?
• Sell out?
• Grow?

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?
• None?

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:

1. Your suitability to be a franchisee;
2. The credibility of your franchisor;
3. The business itself; and
4. The fairness of the deal.

If you are healthy in all areas, chances are you will probably succeed in your venture into franchising!

Good luck!

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 bill@franchisesystems.com.au.

What industry are we talking about? Franchising.

Talk to the owners of Australia’s reigning No1 franchise operation, Nabi Saleh and Peter Irvine of Gloria Jean’s Coffees, which was named 2005 Franchisor of the Year, and they have a different story.

The pair’s award-winning franchise now has 165 stores in Australia and despite coffee shops everywhere, the business grows.

Irvine says they have tried to cultivate a family atmosphere and it’s working at the moment.

Bill Lockett, of the Franchise Systems Group, says it is a mistake to believe that because something becomes a franchise that it will work.

Franchises can hit critical mass and it is always good to be able to pick a franchise on the way up that will grow bigger, Lockett says. Get in when there’s less competition. “The healthy businesses are doing well at the moment. And there’s still plenty of potential.”

Franchising has long boasted that it is the most successful business model, with fewer bankruptcies and more profitable businesses than any other form of small business.

It also has the federal Government’s seal of approval.

“Franchising is a vibrant and innovative way to do business — and it employs just over 600,000 Australians,” Small Business Minister Fran Bailey said at the Franchise Council of Australia’s award night last year. “The Australian Government is a strong supporter of franchising and will continue to work with businesses in key areas such as workplace relations, red tape reduction and taxation.”

The industry has flourished since the Howard Government introduced regulations in the form of the Franchising Code of Conduct to reduce the incidence of franchisors misleading potential franchisees.

Franchise Council of Australia chief executive Richard Evans is proud of franchising’s achievements. “It contributes 10per cent to the economy and employs more than 600,000 people in over 64,000 workplaces,” he says.

But pioneer franchise system developer Howard Bellin, of IF Consulting, warns new entrants to tread carefully when selecting a franchise.

“Sadly, many Australian franchises are sold to retrenched people who are simply buying a job,” he says. “How much goodwill does a dog-washing, window-washing or lawn-mowing franchise command when a franchisee decides to sell?”

Bellin argues the Australian legal system stifles franchisee rights. In the US, aggrieved franchisees can bring class actions against franchisors and, if a franchisor loses, it pays not only compensatory damages, but also treble punitive damages. Also, US lawyers work on contingency, earning one-third of the damages assessed if they win and nothing if they lose.

“In Australia, litigants with the deepest pockets usually win,” Bellin says.

Attempts to form a franchisees association have failed at least three times. While the FCA welcomes franchisees, realistically it is a franchisors association.

And a court win for a franchisor last year has made buying into a franchise even more of a caveat emptor — buyer beware — situation.

Bellin points to US expert Kent Craven of Franchise Resource Co, who puts would-be franchisees into franchise businesses and who was interviewed by the Boston Globe newspaper.

Asked about franchising’s less-risky business tag, his reply was sobering.

“I caught some flack last year when I was quoted in a magazine article as saying that half of all franchises are crap,” he said. “But it’s the truth — half are crap.”

Craven is cautious about franchising being seen as virtually foolproof. “Not only can you fail, it can drive you crazy, literally,” he said. “In one case, the franchisee not only lost every dime — her house, everything — she ended up in a mental health facility.”

Right now, Australian franchising seems happy. Psychologist Greg Nathan released statistics pointing to fairly happy franchisees.

In his The Franchise Relationship Balance Sheet, Nathan found:

• 92 per cent of franchisees say they enjoy their roles and work;
• 80 per cent believe their franchisor treats them fairly;
• 57 per cent of franchisees are currently satisfied with profit.

The numbers give out a loud warning. If you are in the market for a franchise, make sure you are not in the one-in-five franchisee category that thinks their franchisor treats them unfairly. And hope you are not in the 43 per cent who are unhappy with their profit.

Over the past couple of years there has been a growing emphasis in franchising on the commercial side of the business.

The shift contrasts with the main focus seven or eight years ago on creating better and more honest relationships between franchisors and franchisees. This flowed from the franchising code of conduct introduced in 1998 to stamp out opportunistic practices by some franchisors.

David Campbell, of Avatar Business Navigators, was heavily involved in the then Franchise Association of Australia, which is now the Franchise Council of Australia.

Campbell says the new emphasis will be illustrated at an FCA conference to be held in Brisbane in May. The theme of the conference will be the viability of the franchise industry.

“It’s one thing to say that franchisees must make money from franchising, but if the franchisor is not making money then nor will the franchisee,” he says.

Franchise Systems Group consultant Bill Lockett helps franchisors establish their businesses and says that as franchising continues to develop, the variability of franchise groups increases.

“In many franchise businesses there are a lot of average performers in the middle with some top performers at one end and poor performers at the other,” he says. This contrasts with benchmarks that suggest a franchisee should be looking at a net profit of 10 to 15 per cent as well as a return on invested capital of between 25 and 35 per cent as a minimum.

Where a franchisee is earning significantly less than these benchmarks, he or she is likely to be unhappy. Franchising is not about buying a job. It’s investing in the business to create an income as well as grow your capital, he says. It’s the responsibility of franchisors to ensure this happens.

Campbell says that prior to the franchising code of conduct, the franchising industry suffered from the activities of opportunists who were often less than frank about what they offered. Now that these times have changed, the focus is turning to a more commercial relationship.

A major challenge for franchisors is managing the expectations of franchisees. Research has highlighted often quite wide variations in the businesses being run by different franchisees. There can sometimes be as much as a 30 per cent spread in gross margins earned by different outlets and up to a 40 per cent spread in operating costs.

“The big question you have to ask is how this can be in a franchise group that is selling the same products or services into the same market,” says Campbell.

In addition, up to 10 per cent of franchisees find themselves in businesses that are simply not going to make it. Campbell says the old strategy among franchisors was to put these franchisees under a blanket and try to forget about them or hope they would go away. But they are the franchisees who are most likely to create future problems.

Campbell says a smart franchisor will never ignore a poorly performing franchisee.

The best strategy is to migrate them up into the system by helping them make decisions that should improve their business, he says.

Having performance benchmarks is one solution.

“You need to be able to point out to them using numbers that if they don’t improve their situation they will erode the equity value of their business,” Campbell says.

They will also put the security that they offered to acquire the business at risk. While a franchisee might argue that they are trying their hardest, it’s hard to dispute numbers that show they are underperforming.

Campbell says it is important that franchisors take their role seriously.

While they play an active function in promoting the business to new franchisees, few franchisors see themselves as a business coach.

“I think the market is now moving to a point where some coaching is expected of franchisors,” he says.

“This can be achieved by using the performance of the more successful franchisees to encourage a change in behaviour or approach among those who are lagging.”

Campbell says many established franchisors don’t fully utilise the information provided to them by franchisees. Furthermore, franchisees can be reluctant to provide all the details of what is happening.

However, if a franchise business is falling behind, a franchisor almost has a duty to do something about it.

Having franchisees that fail or perform poorly is not a good thing for a franchisor. It’s bad for the overall business.