Buying a franchise business affects your family, your finances and your future. It is vitally important to do everything you can to ensure that the franchise system you decide on will meet your needs, expectations and goals
Before you start looking at franchises, take stock of that most important component of the equation – YOU. There are certain traits that fit a person to franchising. Other traits suggest you would be a poor fit for a franchise system. Some perfectly good traits for running a business for yourself, don’t fit well with franchising. Independence is one of them. Franchisors need people who take direction. A franchise doesn’t want a maverick. Are you a person who has always been willing to work hard? This trait will serve you well. Franchisors have found that working hard is more valuable than creativity. A common saying for success is ‘5 per cent inspiration, and 95 per cent perspiration’. The franchisor has already developed the business model. They’re also looking for someone who is willing to put in the hours, however long they may be. If you are longing to set your own work schedule, choose your franchise wisely. Most don’t allow that luxury.
Why are you researching this franchise? An inexperienced person may approach the process by thinking, ‘Well, I love coffee. How about a coffee shop franchise?’ And after spending days, or weeks of research on brands like The Coffee Club, Gloria Jeans and others, the individual may find he or she doesn’t have the required capital, the territory or site he or she wants is not available, and they’d have to give up weekends if they owned a hospitality franchise. Another ineffective way to begin your franchise research is to lock yourself in to one or two concepts. If you think, ‘I’ll only look at ice cream or food franchises’, you may miss finding a gem of a concept that would mesh perfectly with your needs. With hundreds of franchise companies available, keeping an open mind is the best strategy you can employ to get on the ground floor of that new, hot concept or to find something that will really take off in your market.
Let’s say you’ve found an assortment of franchises that look promising. What do you do next? Contact the franchisors and request information about their concepts. You will probably get a call from someone in the franchisee recruitment team who will gauge your interest and advise you if the territory you seek is available. You will want to thoroughly view the web site information and any brochures and videos they send you and perhaps fill in an application form and attend several interviews or meetings. Keep notes on your impressions. Are their materials professional and up-to-date? Are you treated courteously by a friendly and knowledgeable member of their team? Are your questions and concerns answered to your satisfaction? What you see from the company at this time may be an indication of the type of support you would receive as a franchisee in their system. So poor service now may reflect their attitude towards their franchisees and is worth discussing these concerns when you speak with existing franchisees.
Your next step is to read the company’s disclosure document, a document every franchise in Australia is required to provide. From this you will learn the history of the company, and what costs, royalties and fees you will be required to pay. Some franchisors also provide earnings claims in the disclosure document but beware these will only be modeled on a typical scenario that may be achieved and are not a guarantee of future earnings or a profit forecast but will help you estimate the potential of the business. By paying attention to what you discover in a company’s disclosure document, you can weed out franchises that just don’t measure up. Some warning signs of a franchise that is facing challenges are extensive litigation with franchisees or a closing rate of units greater than what’s being opened.
We consider this step to be of monumental importance when judging the likelihood of finding happiness in a particular franchise: CALL EXISTING FRANCHISEES! Existing franchisees are your best source of information for finding out what really happens in a business on a day-to-day basis. You can ask what they like and dislike about the business, if they are happy with corporate support, and even get a feel for the type of earnings a franchise makes. Realise that franchisees can be suspicious when you call on them. Could you be someone working undercover for the franchisor? So start out focusing your questions on things that relate to your priorities. This doesn’t force the franchisee into a corner where he/she is wondering if the answers will result in trouble with the franchisor. Also be wary of the franchisee that is in trouble and wants to sell their franchise location to someone else. They may be looking for the best way to get out of a bad investment and don’t want to take any chances that something they say will hurt their ability to sell. In addition to your priority questions, make sure you ask about the good experiences they have had with the franchisor, and any bad experiences that they have had. Ask questions about how much support they get. Find out how long it took to break even. Find out if they found the financial information in the disclosure document accurate. And be sure to ask if they would still invest in the franchise today if they could do it over again. Watch for any indication that the franchisee is reluctant to talk with you. If this happens with one franchisee, it could just be that person’s manner. But if it happens in more than one unit, it could be a warning sign that everything isn’t OK. You may find that some franchisees are doing well. Others might be struggling. Do your best to sort out why this is the case. Be careful that your natural optimism for the system doesn’t prevent you from asking tough questions. Cultivate a little pessimism if it isn’t natural to you. Look for signs that things are not as they should be. You won’t see them if you aren’t looking for them. It is also very important to speak with franchisees who have left the system. If someone was terminated, get both sides of the story. Often the truth lies somewhere in between both sides. But you cannot know until you listen to both parties. Not all the information you discover will be negative toward the franchisor. You might find that someone chose not to renew their franchise because it was time to retire. Another person might have had a family need. Gather a variety of opinions and you’ll get a clear picture of not only the franchise itself but of how you’d fit into the organization. That is why this step is so significant to your being able to make a definitive decision.
Visit competitors. Ask to speak with the franchise owners. Don’t get your heart so set on one franchise, that you don’t study the competition. By comparing systems, you’re more likely to pick a system that really works for you. At the very least, you may discover that the franchise system has problems that you don’t want to get involved with. Another way to research competitors is to look at their websites. Many websites have information about franchising with the company. Even if the company doesn’t have a franchise system, the about us page often gives you useful information. Above all, ask the franchisor: What do you see as the future of the industry you are in? Where does this company stand in its industry? What do you do to keep up with developments? Is there a viable market for the franchise’s product/service? Is there still room for growth? What is its marketing positioning, e.g. price, image, quality? How does the franchisor maintain margins? How dependent is the business on price competitiveness? How good is the competition? These questions apply in all industries, from retail to lawn mowing. What direction is the franchise company moving in? For example, is it adopting new technology as it becomes available/ affordable? Is this important? How will new technology affect costs for franchisees? What exclusive rights to a territory do I get? Can my territory be eroded by the franchisor? At a later stage, can I sell off part of it if I choose to? How do you define a territory, e.g. how many businesses, homes, geographical area, people, type of population? Do I get first option on an additional territory? Who finds a site/conducts market research, etc? How is it done? It is important to get a feel for how ethical a franchisor is. It is difficult to ask questions which uncover this, but try to find out about their reputation from external sources as well as asking the franchisees themselves. Always ask several sources, and don’t be afraid to take up references – that is what they are for. If all the above seems a bit daunting please don’t be put off. Franchisors are used to answering questions about their businesses, and expect to have to satisfy enquirers and their professional advisors as to the integrity of their business. You owe it to yourself to be thorough. If you are thinking of buying a franchise, it will pay you to sit down and work out what you need to know before you meet with the franchisor. It will probably take several meetings, with increasing levels of detail, before you are in a position to make your decision, so be prepared for that.
The last step, of course, is making the final decision. Like any major decision, you will be filled with anticipation and anxiety, excitement and fear. These are very normal feelings, experienced by almost everyone. But if you’ve done your homework and followed the steps as outlined, you should be very comfortable with your decision and ready to become a franchisee. The step you are considering is a major one so don’t try to do it without taking proper advice. But remember – you will not be doing this work in isolation. You need to enlist the help of suitable advisors (at least a lawyer and an accountant) to help analyse the franchise relationship and its potential. It will also be their role to explain to you the implications of the various choices you are now making, so don’t skimp on this advice. Finally, please don’t be tempted to think that a few hours surfing the internet is any substitute for doing proper research. There’s some great information available on the internet but it’s no substitute for asking hard questions and getting answers that are individual to your own position and your chosen franchise.
Kevin Bugeja, Managing Director
Suite 201, Level 2, 566 St Kilda Road,
Melbourne, Vic, 3004
1300 FRANCHISE (372 624) 0412 511 630
The above article is an excerpt from Kevin Bugeja’s chapter ‘Choosing the Right Franchise’ which appears in the 4th Edition of the Australian & New Zealand Business FRANCHISE GUIDE book, out now all major booksellers or through www.businessfranchiseaustralia.com.au or www.franchise.org.au.