This article appears in the Jan/Feb 2016 issue of Business Franchise Australia & New Zealand
It’s a new year and you are looking at investing in a franchise business. The greatest risk you take when buying a business is to rush in without doing enough research.
Here are 10 steps to get you started.
Get a copy of the Franchise Guide (you can download from the Australian Consumer and Competition Commission – ACCC site) www.accc.gov.au or telephone 1300 302 502. This guide will outline the Franchising Code of Conduct and provide a reference point for obtaining additional information throughout your research process. Franchisors are required to provide certain information about their business. The Code is supported by the law and administered by the ACCC.
Look at what franchises are available. Coffee shops, 24/7 gyms, lawn mowing, sandwich selling, printing, the list goes on. Go to a franchise directory; visit a franchise expo; surf the internet or look around your local area.
Talk to your accountant, solicitor, banker and financial advisor. It is important to get independent advice from experienced professionals you can trust. Assess how much money you have available and/or how much capital you may be able to borrow. Ensure you have a full understanding of the total ingoing costs including purchase price, stock, legal costs, stamp duty, accounting costs, working capital etc. Also look at your ability to raise additional capital to cover any unforseen cost or emergency. When looking for advice ensure you are dealing with someone who is a franchise specialist. For example, some banks have specialist bankers, who due to their knowledge and experience can save you time and money.
Once you have identified a franchise system which interests you, get into the detail. Ask to see the disclosure document which contains a large amount of useful information. Don’t be surprised if the franchisor requires you to sign a confidentiality agreement. You should read the disclosure document and accompanying franchise agreement from cover to cover and compile a list of questions for further research.
Discuss the disclosure document, franchise agreement and property lease (if applicable) with your lawyer. Ask yourself these questions – What is the franchisors track record? Do I fully understand their business systems? How are the other franchisees within the group going? How many franchisees do they have? Why have others left the system? What are the plans for expansion and will this impact my business? How will I grow the business? What kind of training and support does the franchisor provide?
Talk to your accountant. In your financial analysis calculate how much profit you can expect to make and what your breakeven position is. You will need to allow for business overheads, rent, wages, purchases and replacement of equipment. Will the expected profit be enough to cover both the time you will be working in the business and the financial risk you are taking in purchasing the business? What is the business worth? Look at the financial position of the franchisor. Do they have the financial strength and capacity to run, develop and grow the business? Are they reliant on selling franchises to meet their operating costs or do they generate sufficient revenue from ongoing royalties?
Talk to a wide range of franchisees about their profitability, relationship with the franchisor and any problems they may have encountered. Is the franchisor supportive and delivering on their obligations? Is the franchisor providing enough operational support? Are the marketing, advertising and product support meeting their expectations?
Expect the franchisor to undertake a comprehensive investigation of you to determine if you will be a suitable franchisee. Some franchisors will require multiple interviews and assessments which may include reference checks and psychological testing. If they are sloppy with this they could be sloppy with their business. If they rush, ask yourself why are they in such a hurry? Progress at a speed you are comfortable with.
Contact the ACCC to find out if they have had any dealings with the franchisor? Have they been investigated or prosecuted?
You want to be confident that the franchise business is reputable, financially strong and good at what they do. Look at the business from the customer’s perspective. Is the product or service evolving? What level of research and development is the franchisor doing? It’s natural to be both excited and apprehensive. Don’t skimp on your research and use the combined experience of others such as your banker, lawyer, accountant, business advisor, the franchisor, existing franchisees, former franchisees, the ACCC, state small business centre etc.
Steve Seddon is a Senior Business Development Manager with Westpac. He specialises in the franchise sector and is on the Franchise Council of Australia Western Australian Committee. He holds a Bachelor of Commerce degree, Diploma in Franchising and is a qualified CPA.
Westpac has supported the franchise sector in Australia for over 20 years. The bank has a national network of franchise specialist business bankers who are able to deal with the specific needs of the franchise sector.
Contact Steve at:
P: 0407 401 892