Franchising is a popular choice with Australians wanting to buy into a business that has structure and a proven track-record. But is this the right choice for you? Domini Stuart considers the risks, benefits and grey areas of franchising.
If you’re thinking about buying a franchise, you won’t be stuck for choice. Per capita, we are the most franchised nation in the world, with 950 franchise systems costing anything from $25,000 to $750,000 and ranging across retail, service and distribution. So how do you find the right one?
Tim Dixon, director of Franchise Works, suggests the first things you need to clarify are the exact nature of the opportunity, and what is expected of you as a franchisee.
“Some people buy into a franchise without thinking about what they will actually be doing on a daily basis,” he says. “Running your own business, franchised or otherwise, can take over your life. Are you sure you and your family are comfortable with the demands that will be placed on your time and energy? Are you passionate about what you will be doing? If you’re not passionate you’ll be mediocre, and if you’re going to be mediocre there are better alternatives for a much lower cost.”
When it comes to cost, some people are tempted to invest every last cent in the business on the assumption that everything will go smoothly. The reality is that things often do go wrong and, if you don’t have the resources to ride out something like an unexpected economic downturn, you could end up having to sell the business.
It’s also important to be realistic about what you need to take from the business. What will be the return on your investment? What salary do you need? If the business did fall over, are you protected or could you lose everything?
There are a number of ways you can assess the risk. “Banks are now starting to acknowledge the value of the infrastructure and support that comes with a franchise,” says Dixon. “Some are loaning between 50 and 70 percent against the business rather than on some other security like your home. If the franchise you’re considering has this kind of bank accreditation it’s a good sign.”
Dixon says you also need to establish the likely long-term return on your investment, and that means considering how easy it will be to sell. He also recommends asking for evidence of current franchisee success. “Some franchisors won’t give out that information but that in itself would make me suspicious,” he says. “And look into any terminations within the franchise. How were they handled? Did the franchisee get any money? How many have there been?
“Realistically, there are always going to be one or two people opting out of a system. But if, say, 20 percent of the outlets are up for sale, there’s something wrong.”
Existing franchisees can be a good source of information. The franchisor must provide a list of the current owners and their contact numbers, and the Franchise Council of Australia (FCA) recommends ringing at least half of them, or up to 10 if there are a lot, and asking if they are happy. This way you should get a good feel for overall levels of satisfaction.
Before purchasing her Curves franchise in Sydney’s inner west, Sally Fitzpatrick spent a lot of time talking to people who were already running fitness centres in Australia. She felt this was particularly important as Curves is based in America. “I realised very quickly that you can’t base everything on what’s happening in the US,” she says. “Here, lease costs and insurances are higher, wages are higher; there is a totally different break-even point. I liked the fact that Curves had a very low entry point that included all of the equipment, and that the royalties are taken as a flat fee rather than a percentage. But, as this is all based on US dollars, it’s subject to fluctuations in currency. That’s something you have to be aware of if your franchise is based overseas.”
Fitzpatrick has also learned not to make any assumptions. “My expectation was the McDonald’s style model, where everything is determined for you, from staffing models and percent marketing spend to layout and colour scheme,” says Fitzpatrick. “Curves leaves many of these decisions up to individual club owners, though they do provide really great sales strategies and marketing ideas. Also, there was certain information I didn’t think to ask about that would have been very useful to me in the first year of business. For example, had I better understood seasonal cycles I could have taken steps to counteract the effects.”
“The wheel has been invented,” says Dixon. “It’s the franchisor’s responsibility to uncover where profits are being generated and share that information, and there are some who go to great lengths to make it easier for their franchisees to generate a profit.”
As a first-time franchisee, John McDonald appreciates the assistance he’s had in making a success of his NightOwl convenience store. “NightOwl took care of all the initial store set-up process,” he explains. “All we literally had to do was turn up on opening day with our float and our keys and we were ready to go. If you call them, they are always there to help. If you have issues with suppliers, they deal with the problem for you, which takes away the stress of operations.”
Andrew Eustace, who bought a franchise with First Class Accounts in 2001, believes taking on your own business can be especially difficult when you’re making the transition from employee. “The typical bookkeeper is not a natural entrepreneur,” he says. “Doing your own marketing requires a completely different set of skills, and it can be particularly challenging where you don’t have shopfront visibility.
“One of the reasons I chose First Class Accounts,” he adds, “is they acknowledge this and provide a lot of support. When the training was finished, I really did feel equipped to approach and handle clients.”
As you draw closer to your decision, it’s time to check off the legal details. Do the franchise documents comply with the regulations set down in the Franchising Code of Conduct? This is the time for independent professional advice, though you should bear in mind that a franchisor is unlikely to make major changes to their standard agreement.
“I have seen some unscrupulous lawyers suggest extensive changes to the disclosure document then charge five or six thousand dollars even though they were all rejected,” says Dixon. “This is not good advice. You need someone to alert you to any risks and highlight areas that need clarification, not start a legal battle.”
Tony Arena, director of Buy a Franchise, suggests you ask yourself one final question: is buying the franchise too easy? “Franchisees often ask a lot of questions but don’t find as many questions coming back from the franchisor,” he says. “If the franchisor looks too keen to sign you up, step back and maybe look for a franchisor who is harder to buy from.”
Franchise Purchase Questions
Before taking the plunge and buying a franchise, Tony Arena (BuyaFranchise.com.au) suggests asking the following questions:
• Are you good at following directions?
• Are you looking for steady growth?
• Are you conservative rather than highly entrepreneurial?
• Do you like working in a team environment?
• Are you not quite sure about what business you want to buy?
• Do you have capital to survive the early days without having to cut back on important business expenses?
• Do you have the courage to persist in tough times?
• Are you willing and able to learn, grow and adapt?
• Are you skilled in either gaining or retaining clients?
“Running a franchise operation can be very rewarding both financially and personally,” says Franchise Works’ Tim Dixon. “Franchisees have invested money in your business. Generally, they are much more driven to help you succeed than people in company-owned networks. And, if your value proposition is strong enough, you may not need to wait until you have two, three or four successful businesses before deciding to franchise.
“However, it is important to understand that running a franchise operation is very different from running your own small business. You need to ask yourself whether this is what you really want to do.”
The Franchise Council of Australia’s 12-point guide could help you make your decision:
• The business must be pilot tested with company-owned and operated outlets.
• Your business must be successful, distinctive and replicable.
• You need proper professional advice from a solicitor, banker, accountant, and possibly a franchise consultant.
• The Franchise Agreement must be written by an experienced franchise solicitor.
• You need an operations manual; take the time to write one.
• Choose franchisees very carefully and slowly.
• Avoid overselling and forecasts.
• Have first-class training.
• Maintain good ongoing relationships.
• Focus on franchisee satisfaction and profitability.
• Keep developing the franchise and maintain standards.
• Ensure marketing, advertising and PR is first class.
* Franchise Works franchiseworks.com.au also offer a free opinion as to whether a business is ready to franchise.