Evaluating a Franchise Business

Mark Fernandez, Director, Business Development Alliance

By now you may have made two of the most important decisions that will affect you and your family.

Firstly, you have made the decision to become part of Australia’s burgeoning small business sector and secondly, more particularly, to join the franchise business sector.

Most importantly however, you have also selected a particular type of franchise business. It may be a bricks and mortar business or a mobile service business in the local area. Your challenge is to now conduct a thorough review of that franchise to ensure it is aligned with your personal goals.

It is important to approach this evaluation process in an orderly and systematic manner so as to ensure that you retain composure and clarity thus avoiding any rash decisions.

The key component parts to this exercise can be best summarised as your Franchise Selection Plan. That is to say, that when completed, the results will determine for you whether or not all of the risks are known and whether or not they are in balance with the potential rewards. If not, you should not proceed.

Those key elements to your evaluation process are:

• The Franchisor
• The System
• Self Evaluation
• The Financial Picture
• The Market
• The Future
• Security

Obviously, the starting point in any evaluation is the franchisor. Should you proceed to acquire a franchise business you
will have a contractual business relationship with this person or persons that demands a workable relationship based on mutual respect, honesty and trust.

A requirement under the Franchise Code of Conduct, is the provision by franchisors of a formal Disclosure Document. This
is a document that outlines the operating structures, fees, details of the franchisors experience and people, litigation history,
existing and past franchisees, details of the franchise sites or territories and other operational aspects of the system.

You should ensure that you meet all of the people that you will be dealing with in the normal course of conducting business as
a franchisee. This is to make sure that no serious personality conflicts exist. It would be naive to expect that everyone will adore everyone else, however you must be able to establish a sound working relationship.

In the process of these talks you will come to understand the depth of experience held by the franchisor and other key personnel. Naturally, as the people who ultimately control the franchise group, their experience needs to be substantial and successful.

The Disclosure Document will outline for you the key financial data on the franchisor. Make sure that they are financially sound and not at risk of financial duress.

Once satisfied that the people are right and that their experience provides a safety net for you, then you can start to look at the system.

Any successful franchise business must be systemised and moreover, system driven. Simply put, this means that any reasonable person or persons without the need for previous experience or a Harvard Diploma could, with training and support from the franchisor, become competent at running that particular business. Mostly those systems and controls are maintained by the franchisor and shared with franchise owners in the form of operational and procedure manuals. The absence of these ‘Bibles’ in any system would reflect a flaw and increase your risk factor, unless other activity substitutes their purpose.

You must feel entirely confident that, with a comprehensive training programme provided by your franchisor, together with
ongoing support and further training, you can adapt to the key functions of running and managing your business to a competent level.

If you feel that some areas particularly concern you, discuss those with the franchisor, it may mean that the business is
wrong for you. Equally, it may mean that an emphasis on that area during the training and support process will overcome your

Franchisors do not seek to take risks in the selection of a new franchisee; they will need to be certain that your prospects for
success are high, thus avoiding unexpected difficulties in the future. Be sure to speak with as many existing franchise owners
as possible during this evaluation process asking them about all elements of the business and of course the franchisor. It is
important that you declare to them your level of interest and then they will be frank and honest with you.

Perhaps the most important element to this process is that of self evaluation. Too often we are guilty of kidding ourselves about what we can or cannot achieve. This is where you, your partner and other family members must understand clearly the level of commitment that the business will require and the impact that it may have on everyone. Take time also to ask the obvious question, “Is this a job that I can do well?” and be honest with yourself.

At the heart of any business are the dollars and cents. What does it cost? How much does it make? Is there a margin for safety?

It is important that the financial picture for any business be discussed with a competent accountant, preferably one experienced in the understanding of franchised businesses.

Without that experience they might consider royalties and advertising levies as an unnecessary impost on the business and not recognise the benefits that they bring to the business.

Importantly, you must undertake your own research to be satisfied, that in your hands, your new business will perform to a level that removes the risk of failure due to nonprofitability.

The franchisor may provide you with examples of sales and profit from other locations - be sure that you clearly understand the validity of such information and whether it is appropriate to use it as a benchmark for your own exercise.

Again a franchisor would not seek to appoint a new franchise owner without a strong belief that success will follow.

Your experienced Accountant will have an opinion on the ‘value’ of your investment in this franchise - be certain that their opinion is sound and based on ‘fact’ and not ‘feeling’.

All businesses require a market place within which they can sustain and hopefully increase a share and enjoy the resultant
financial rewards.

For you to contemplate entering any industry you must have a basic understanding of the prevailing market conditions. Your
franchisor, with the advantage of years of experience should explain to you the state of the market and the position that the group presently enjoys.

More particularly your proposed franchise will likely have a territorial location and again your franchisor should be able to explain to you the opportunity that exists in market share terms. Competition will always exist and is a necessary component
for all businesses but be on the lookout for saturation as this increases the risk factor greatly.

You must be satisfied that there exists a demand for the services or products that your future business will provide and further that there is sufficient opportunity to sustain and grow that demand at least for the term of your franchise agreement and ideally for all time.

It is when you look at the question of future maintainable earnings that you will again need to speak to the franchisor and be
satisfied that, apart from a world war or some freak disaster that no-one could plan for, there exists a plan that will take the group and all of its members into the long term future with confidence.

Your Franchise Agreement will be for a set term, probably five, ten or maybe 20 years. At any time during that term you will
likely have the option to sell your franchise business to someone else approved by the franchisor. If you cannot be convinced of a long term future for this franchise then its ‘goodwill’ value to you in the long term is suspect.

Fortunately businesses with only short term market prospects do not suit a franchise structure and you will probably not come across one.

Having looked at the people, the system, the financials and the market it is now time to study and understand the security that you will have in your proposed new venture.

Fundamentally this security is outlined in your Franchise Agreement.

By now you will have read and understood the Disclosure Document which will have outlined the key components of your agreement.

It is important for you to understand the agreement - not the legalistic jargon, but the rights and obligations placed on you and
your franchisor.

Fortunately today, most agreements are written in plain English and are relatively easy to read and understand, so take the time to read the agreement yourself, highlighting anything that is either unclear or inconsistent with your prior understanding.

Before you go rushing off to a Lawyer, go back to your franchisor and discuss those points that need clarification and then armed with the answers make an appointment with a reputable, experienced franchise lawyer and ask them to brief you in respect to your rights and obligations.

Your Lawyer may have an opinion on some of the commercial components of the Franchise Agreement as opposed to the legal structure, as with your Accountant, be sure that the opinion is relevant.

Armed with a series of queries from your Lawyer you will then need to have a meeting with your franchisor and discuss them in detail.

It is unlikely that any franchisor will customise a Franchise Agreement to suit individual franchise owners as this creates a
breeding ground for management difficulties and contention between franchise owners.

Nonetheless, if you are not satisfied that the agreement is fair and equitable, even though it is biased in favour of the franchisor (and needs to be) then do not proceed further.

Hopefully the franchise business that you have selected will pass this process of evaluation and you can then confidently
proceed to enter the exciting world of self employment.

Mark Fernandez is a Director at Business Development Alliance. He brings over 20 years of senior management experience
in franchising and business development and has assisted many businesses along the journey of franchising. Mark is a
committee member of the West Australian Chapter of the Franchise Council of Australia.

Business Development Alliance are involved in assisting you GROW YOUR BUSINESS. Their specific focus is on helping you discover the unexploited potential in your business. Their aim is to help you make your business even more profitable and therefore more valuable.

For more information on contact Mark at:

Email: mark@bda-online.com.au
Web: www.bda-online.com.au