Are your expections realistic?
This article appears in the November/December 2013 issue of Business Franchise Australia & New Zealand
A new report from Griffith University found franchisees who take part in pre-entry education have higher levels of satisfaction. Why? Because their expectations are more realistic.
In 2010 the Australian government funded research designed to get a better understanding of franchisor-franchisee conflicts. There are no prizes for guessing that a lack of communication was identified as a major cause of friction. The survey found that about a third of franchisees indicated communication within their franchising relationship was unsatisfactory. Dig deeper and the survey revealed some disturbing trends. It found that around half of the franchisees surveyed relied heavily on their gut feeling when deciding to invest in a franchise. What’s more, despite an obligation for franchisors to provide accurate disclosure documents, around 40 per cent of franchisees said they faced surprises after buying their franchise.
The findings proved to be a catalyst for the development of a pre-entry franchise education program by the ACCC and Griffith University’s Asia-Pacific Centre for Franchising Excellence. It is a convenient, free, online course that aims to go beyond the text book, and provides practical advice and tips for would-be franchisees. It is designed to assist prospective franchisees make informed investment decisions, help them understand the demands of franchising, and know where to go if things turn sour.
From a regulator’s perspective it makes sense to prevent problems escalating to the point where a complaint is lodged. By lifting the lid on the commitment and compromises involved in running a franchise and providing people with the know-how to assess franchise business opportunities, some problems can be addressed before they surface.
From a would-be franchisees perspective it also makes perfect business sense. Investment decisions should be based on more than just a hunch— due diligence is a must. Due diligence simply means making sure you know all that is necessary to make an informed decision about the business you’re investing in, and are able to confirm what you’ve been told by the franchisor.
To avoid problems down the track it also pays to understand the Franchising Code of Conduct. This mandatory industry code sets out the legal rights and obligations of all participants in the franchising industry, and assists you in making reasonable and informed decisions about purchasing a franchise.
The Code provides you with certain protections during the term of your franchise and includes dispute resolution procedures. The Code also places obligations on your franchisor that impacts on the ways in which they can end your franchise agreement, and provides you with rights in instances where you choose to leave the franchise system.
Three years and half have now passed since the pre-entry program was launched, and around 5,000 people have enrolled. This benchmark has been a good time to take a step back and see if the program has been delivering its hoped-for benefits.
Griffith University conducted research to compare the experiences and decisionmaking processes of those who completed the pre-entry education program with those who didn’t. The results? The research report, released in August, concluded that prospective franchisees who completed the pre-entry franchise education program were more confident and made more informed decisions. Another key finding was that participants in the pre-entry program had more realistic expectations of franchising performance, which in turn meant that they had higher levels of satisfaction with their franchise system.
The report also found that franchisees that completed the training had a broader appreciation of the influencing factors (both internal and external) on their franchise. The majority of participants indicated that completing the program had either reinforced their decision to invest in a franchise system or gave them a greater level of confidence and awareness about investing.
When asked to reflect on their experiences and provide advice to other prospective franchisees, it was interesting to see that the most common response was to ‘do your homework’ and to ‘obtain independent advice’.
As this study indicates, prospective franchisees should contact as many current and past franchisees as possible to ask them a range of questions. This provides the best opportunity to get information from people with experience in the franchise business.
A few practical questions to ask current and past franchisees include:
• How many hours do you work?
• Are you earning what you expected?
• Have you had any disputes with the franchisor and if so, were they resolved?
• What training and support have you received?
• If you could go back in time, would you invest in this franchise again?
It is also important to talk to professional advisors such as solicitors, financial advisers and accountants (preferably ones with franchising expertise), as they can provide valuable assistance. For example, they can guide you through the finer points of contracts or the complexities of franchise finances.
In conducting the research Griffith University encouraged participants to tell their ‘stories’ and to reflect about their encounters with franchising. This section of the report offers some great insights for prospective franchisees.
One participant said: “Study the franchise agreement carefully. There’s a lot of info but you have to know it. You need to know how easy or difficult it is to get out.”
This advice is consistent with the ACCC views. Franchisors are required to provide prospective franchisees with current information about the franchise operation in writing – this is known as a ‘disclosure document’.
The disclosure document includes financial information and details such as whether you will have an exclusive territory and what will happen when your agreement comes to an end. You must be provided with the disclosure document, along with a copy of the franchise agreement (in its final form) and a copy of the code, at least 14 days before signing an agreement or handing over a non-refundable payment.
Your franchise agreement is a contract between you and your franchisor. Once you sign the agreement, you will be legally bound to its terms and conditions so it’s important that you read the agreement carefully and ensure you understand the legal effect of what you are agreeing to.
Another comment from a franchisee in the recent report sums it all up pretty well: “Go in with your eyes wide open and ask a lot of questions.” To help you get started, the ACCC / Griffith University pre-entry program gives you the clues on where to look and the questions to ask.
Are you considering investing in a franchise? If so, sign up to the free pre-entry franchise education program at www.franchise.edu.au/pre-entry-franchise-education.html. The Griffith University’s Preparation for Franchising study is available at: www.franchise.edu.au/preparation-for-franchisingresearch.html
The ACCC has also produced several franchising publications containing useful information for prospective franchisees, including a Franchisee Manual and a DVD about the Franchising Code. These are available online at www.accc.gov.au/franchising or by calling the ACCC’s Small Business Helpline on 1300 302 021.
Dr Michael Schaper is Deputy Chairman of the Australian Competition and Consumer Commission.
Topics covered in the free ACCC /Griffith University pre-entry program include:
• An overview of franchising sector and the Franchising Code of Conduct
• Franchise disclosure, agreements, royalties and finance
• Franchise support services, site and territory selection, retail leasing and franchise marketing funds
• Franchising intellectual property, the operations manual, franchisor-franchisee relationships and dispute resolution
• Questions to ask franchisors and existing and former franchisees, additional due diligence, useful business skills and assessing suitability to become a franchisee.