Expert Tips on What to Look for in a Franchise Opportunity

Robin La Pere | No Ordinary Business

If you’re keen to run your own business but lack experience or don’t want to go it alone, then a franchise could be for you. But which one? There are plenty of articles on the subject, and some even include lists of up to 250 questions for prospective franchisees to ask - but in my experience as a franchise manager, franchisor and franchise consultant, many miss the mark. Unfortunately most miss the most crucial questions or ask the wrong questions altogether.

Here’s an example. An article I read in Forbes magazine recommended that once you find a franchise opportunity you like the look of, you read their entire Disclosure Document and consider hiring professional help.

On the face of it, both those recommendations make perfect sense. A Disclosure Document which must under Australian law be provided to every prospective franchisee before a Franchise Agreement may be signed, contains the information necessary for making an informed decision about buying a franchise. But a study* by Uri Benoliel and Australian researcher Jenny Buchan found that prospects tend to avoid reading Disclosure Documents (DDs).

The reasons? Benoliel and Buchan found that many franchisees have what they called “optimism bias” – they are over-optimistic about their prospects and abilities when buying a franchise, so don’t see the need to read the DD. The latest Parliamentary Inquiry into Franchising also found that one in five franchisees felt that DDs were too complicated.

There’s not much that can be done about optimism bias – except to remind you that all businesses, even franchised ones, have risks and must be thoroughly checked out – but the complexity of DDs is something that can be solved.

Get professional advice. And not just any advice. Specialist franchise advice.

Several franchisee submissions to the Parliamentary Inquiry made the recommendation that there should be a mandatory due diligence process, including the requirement to seek advice from accredited franchise professionals. The only problem with this is that there is currently no regulated accreditation system specifically for franchise consultants, accountants and lawyers as there is for financial advisors and business brokers.

Given that you’re new to franchising and have probably don’t know one end of a Franchise Disclosure Document from the other, how do you get franchise advice you can trust?

First of all, make sure that the franchise consultant, accountant or lawyer that you contact is, in fact, a specialist in franchising and not just your own or a general accountant or lawyer who tells you that they understand franchising. If they are not a specialist, they won't understand franchising.

Second, make sure they are not associated in any way with the franchise you are interested in purchasing. Most franchise consultants, accountants and lawyers make their money from franchisors, not franchisees.

Third, recognise that no matter how sound the advice you get is, it’s up to you to make the final decision. You have to feel comfortable with your chosen franchise. You must do your homework and ask the right questions.

Doing your homework means taking the time and effort to find out what makes a franchise tick, including why customers would buy from you, how franchisees feel about being part of the franchise, and what the franchise offers you in terms of marketing, systems and training and support. This means not only talking with the franchisor, but also a range of franchisees, both those who have been in the franchise for a while and those who are relatively new. I strongly recommend that you write down a list of questions for both parties. Questions you may want to ask franchisees include:

  • Has being in the franchise met your expectations in terms of the support you have received from the franchisor?
  • What’s your relationship with your franchisor like?
  • Has your business done as well as you thought you would?
  • What has surprised you?

I also recommend that you do online research about the franchise, in particular checking out reviews to assess customer ratings and satisfaction. Too many prospective franchisees forget it is the customer who will pay them, not the franchisor. I would even suggest you talk to some of the franchise's customers if possible to gain an insight about how they feel about the business, and assess competitors to see if they seem to be doing anything better than the franchise you're interested in.

And, what about working in a franchised business for a week or two, to give you a feel for what it's like? Some franchises allow you to do this. Some, such as McDonald's, even insist on it.

I mentioned earlier that there are questions that absolutely, positively must be asked before you decide to buy any franchise. They are questions you must ask yourself. They are:

  • Am I right for franchising?
  • Where do I see myself in five years?

Am I right for franchising?

The first question may seem to be the wrong way round. Surely you should be asking "Is franchising right for me?" not "Am I right for franchising?" The difference is subtle but essential. Franchising is a two-way street. John F Kennedy said, "Ask not what my country can do for me, but what I can do for my country." The same principle applies to franchising. Are you prepared to contribute to the common good of the franchise rather than purely your self-interest? Are you a team player? Are you willing to fit into a franchise's collective culture, follow the systems and not just go your own way?

Franchising is not a guarantee of success.

Why would you consider buying a franchise rather than buying or starting a stand-alone business? The most common reason is that the "stand-alone" part of an independent business is a bit too daunting for newbies to business. Franchising, by contrast, offers the security of training and support from the franchisor, as well as a proven business model.

But, what too many franchisees don't realise is that in franchising as in any business there are no guarantees of success. Not all franchises are a good bet, and even in those who are, there may be failures. In my experience, there are in even the most successful franchise business a percentage of franchisees who under-perform other franchisees.

Why?

Sometimes it’s because franchisees who under-perform lack the skillsets necessary for success. Sometimes it's because they fail to understand the need to follow the franchise's systems.  And sometimes it's only because not everybody is cut out to run their own business. Statistics prove this. In almost all countries, no more than one in seven (and more often one in 10) of the working-age population own their own business. It's just not that easy to walk away from a regular, predictable income, no matter how much you hate “working for the man”.  No one said building a business is easy. And if you think building a franchised business is going to be much easier, my advice is to stick with your day job.

Where do you see yourself in five years?

My second ‘crucial’ question may seem as odd as the first. But as Stephen Covey said, it always pays to “begin with the end in mind.” Most franchisees don’t. Nobody goes into franchising expecting the worst, so they don't tend to think about the consequences if being in business doesn't turn out as they believe it will and they want out. But neither do they tend to think about the implications if the business is thriving and they want out.

Before buying a franchise, you should ideally spend almost as much time thinking about how you can get out as you do about why you should get in.

What if you find that for whatever reason your business doesn’t perform and you lose money? What if your landlord won’t renew your lease or bumps up the rent? What assistance and options would be available to you from the franchisor?

On the other side of the coin, what if the business is successful and you want to a) grow it b) run it under management so you can take time off or c) sell it? Might other franchise territories be made available for you to buy so you can grow? Does the franchise agreement allow you not to be hands-on in the business? Would the franchisor automatically have the first option to buy if you decide to sell and under what circumstances could they decline to accept a potential buyer? What share of the sale price would the franchisor be entitled to?    

Here’s another ‘what if’ that more and more franchisees wish they had considered in advance. What if new business models or more innovative products and services threaten your market? This is happening all the time in today's fast-paced and continually evolving business environment. The cliché that franchising is all about a 'proven business model' no longer applies. What is the franchisor doing to keep ahead of the game? What involvement would franchisees have in innovation and change management? What assistance would be available from the franchisor if costly changes needed to be made?

My final word is about franchise rating schemes. In Australia, US-based FRANdata uses a set of standards to independently evaluate Australian franchise systems across what they call ‘critical areas of a franchise system’. These are:

  • System Performance
  • Franchisee Financial Performance
  • Franchisee Engagement and Satisfaction
  • Franchisor Training and Support
  • Franchisor Financial Performance
  • Lender Relations
  • Compliance and Assurance

While this kind of rating system can be useful, it doesn't answer the two crucial questions above. So it should complement not be a substitute for your own due diligence and appropriate professional advice.

And if all this homework sounds too much like hard work? Stick to your day job.

Franchisees’ Optimism Bias and the Inefficiency of the FTC Franchise Rule by Uri Benoliel and Jenny Buchan