Don’t pay the price for not getting the right advice

Bruce Billson | Executive Chairman | Franchise Council of Australia

Don’t pay the price for not getting the right advice

Becoming a franchisee is an exciting decision. It’s the realisation of your dream to own your own business and become your own boss – all with the support of your franchisor behind you.

And while becoming a successful franchisee is in part about putting your heart and soul into the business, it’s also about making sensible and considered decisions and ensuring that from the outset you do your research, understand the risks and get the right professional advice to build a profitable business.

The commitment to become a franchisee is not a consideration to be taken lightly. There are no guarantees of success in any form of small business, and even though franchising is by far the most successful form of small business, it is still a business venture with the many of the same risks inherent to any other business venture. That risk must be fully understood and appreciated.

So, before you make the leap to become a franchisee, ask yourself: can I afford the risk? Or better yet: ask a professional.

The value of professional advice

If you can’t afford to engage experts to advise you on the viability of the franchise business and terms of the franchise agreement (the contract which joins you and the franchisor in business together), can you really afford to buy a franchise?

The cost of engaging a lawyer to review your franchise agreement or using an accountant or business consultant to help you assess the financial viability of the business must be factored into your decision to buy a franchised business.

Consider this for a moment. You’re about to fulfil that other great Australian dream of owning your own home. But there’s a lot at stake, so while you admire the crisp finishes to the new paintwork and just love those shiny kitchen appliances, you still want to check that the foundations are solid and there are no termites in the framework.

So, you hire a building inspector, and if they give you the thumbs up, you engage a mortgage broker to make sure you get the best loan deal possible and a solicitor or conveyancer to handle the complex process of sale.

You do all this because these people are experts at what they do and so that you can rest easy knowing you’ve taken all reasonable and sensible steps to protect your financial future.

Buying a franchise business is no different. It is true that franchising provides small business owners with a three times greater likelihood of running a successful small business compared to the survival rates for a standalone small business.

The business insights, support and systems the franchise model ordinarily brings adds enormously to the prospects of success for the local, often family-owned franchise business. But it is also true that buying a franchised business does not provide a guarantee of success.

Just as when you are buying a house, it’s important that you do your due diligence and understand the franchise system you are considering becoming a part of. And just like when you are buying a house, there are experts such as accountants, lawyers and business consultants who can assist you to ensure the business you are buying hasn’t been built of straw.

There are no shortcuts and no excuses for not thoroughly investigating the franchise system you are looking at buying into, or for not seeking expert advice before signing any contracts or your franchise agreement.

It is unfortunate that, when the FCA does receive phone calls from franchisees who are in dispute with their franchisor – and it should be noted that, in 2016, the proportion of franchisees in dispute with their franchisor across the sector was estimated at just 1.8 per cent – a common theme is a lack of due diligence or a failure to seek appropriate professional advice before entering  into a franchise agreement.

What does due diligence look like?

Put simply, due diligence is the process of researching, asking questions and finding out all the information you can about franchising and the franchise system you are considering becoming a part of.

The Franchise Council of Australia’s website provides useful resources to help get you started on your franchising journey, including questions you should ask yourself about your readiness and suitability to become a franchisee and questions you should ask of a particular franchised business in relation to its own activities, and also to help make an assessment of the prospects for the overall industry or trade of which it forms a part.

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It’s also worth noting here that Australian franchising is governed by the Franchising Code of Conduct, which provides for disclosure of key information about the franchise system by franchisors to prospective franchisees.

The disclosure document will contain, amongst other things, the current financial details of the franchise system, contact details of current and former franchisees and the costs to start operating the franchised business and other payments or fees that franchisees may be required to make.

This is vital information when making your decision to purchase a franchise business, so read the disclosure document carefully and ensure that you get your accountant’s feedback on the financial details. If there are any red flags here, your accountant is trained to find them and alert you to any potential issues.

Take this opportunity too to get in touch with both current and former franchisees to gain an understanding of what it’s really like to be part of the franchise system. Don’t be afraid to ask the hard questions – it’s your potential livelihood and financial future on the line.

If the disclosure and due diligence process start to ring alarm bells for you, take a step back and reassess whether this is the franchise opportunity for you. Don’t feel pressured to make a decision or sign a franchise agreement if you are not completely comfortable with the business, or the terms of the franchise agreement.

Under the Franchising Code of Conduct, a franchisor is required to advise a prospective franchisee to seek independent legal, accounting or business advice before entering into the franchise agreement.

A specialised franchise lawyer will understand the franchise agreement, and know the key issues to look out for. Use this expertise – it’s far better to find out that the terms of the franchise agreement aren’t agreeable to you before you sign it than after you’ve committed to becoming a franchisee.

And if you do have doubts after signing a franchise agreement, remember that there is a seven-day cooling off period after you sign. However, it’s worth noting that depending on the terms of your franchise agreement, there may be substantial monetary penalties for doing so.

No shortcuts, no excuses

Franchising is unparalleled in its opportunity to provide everyday Australians with the opportunity to become successful small business owners. In addition, the protections offered by the Franchising Code of Conduct are designed to ensure this is a robust and successful way of doing business.

But owning any small business – including a franchised business – comes with a degree of risk.

There are no shortcuts and no excuses for not understanding that risk.

In franchising, that means doing your due diligence on your prospective franchisor and engaging expert financial, legal and business advisors to ensure that, if you do become a franchisee, you’re in the best position to make your franchised business a success.