Look Before you Leap
Historically, decreasing employment opportunities lead to an increased interest in entrepreneurship for many. The motivation to be independent and the experiences of a tough labour market encourage people to consider other options, specifically starting a business of their own.
However, individuals may have the capital or the expertise to start an independent business, but not necessarily both.
The numerous challenges of starting an independent small business without prior experience motivate individuals to consider franchising. Franchising offers an opportunity to start a small business with the support of the franchisor’s brand and expertise. The franchise brand provides an immediate leg-up for the new franchisees. The franchisor also offers the much-needed know-how to manage a small business. Franchisors’ expertise help franchisees streamline their processes. The franchisors’ ‘tried and tested’ business model can be a great way to leverage the market for potential franchisees.
The franchisees also contribute to the success of the system with their capital, capability, and time.
Franchising has the potential to offer the delicate balance between being independent and yet mitigating some of the risks of starting a new business. Potentially, the franchisor-franchisee partnership is a recipe for great success.
Thus, it is not surprising that there is an even greater interest in franchising. As with prior downturns, there has been a significant increase in franchise enquiries.
Franchisor-franchisee relationships are long-term relationships. But, not all such relations are ‘marriages made in heaven’. The path to success for new franchisees is not straightforward, especially as there is considerable difference among franchise systems.
The need for careful consideration
Prospective franchisees should conduct careful due diligence in their choice of franchise systems. Else, the pathway to success could easily turn into a recipe for disaster.
Individuals interested in franchising should understand the franchise business and assess the working relationship with the franchisor before committing to franchising.
The Parliamentary Enquiry delivered its report Fairness in Franchising in March 2019. The report focused on efforts to improve the working relationship between franchisors and their franchisees. The Australian Government has since released a response to the Fairness in Franchising report. The Government has also released a “Supporting Guide: Changes to the Franchising Code” in November 2020. Together these efforts should help strengthen franchising in Australia.
The Supporting Guide document is a fantastic additional resource for prospective franchisees.
The document includes a ‘Key Facts Sheet’—a simple questionnaire to help interested franchisees. For individuals interested in franchising, the mock-ups in the ‘Key Facts Sheet’ provide useful guidance on some key questions prospective franchisees should ask franchisors.
Franchisors may be required to provide some version of this ‘Key Facts Sheet’ to prospective franchisees in the near future. Interested franchisees don’t have to wait for new regulations to ask the right questions.
The document is an easy-to-use tool to help prospective franchisees consider more than one franchisor. Prospective franchisees should use the ‘Key Facts Sheet’ to compare franchisors. Using the ‘Key Facts Sheet’ encourages franchisees to take a more well thought out approach to franchising.
However, this should only be used as a screening tool. Prospective franchisees should get professional help to examine the franchise disclosure documents and contracts carefully before committing to the franchise system.
Beyond the ‘Key Facts Sheet’
In addition to the information suggested in the ‘Key Facts Sheet’, prospective franchisees should also seek to understand–franchisors’ selection criteria and the ongoing support. In a large-scale study of over 1000 franchisors shows that selection and support reduce the risk of franchisee insolvency.
The selection criteria assess the franchisees’ ability to kick-start the franchise operations. But there is also a need for franchisor’s ongoing support that complements the initial selection.
Franchisor selection criteria
Prospective franchisees should try and understand the franchisors’ selection criteria. Some useful questions here are:
- does the franchisor require some industry experience?
- does the franchisor require interested franchisees to have a formal education? What is the expected level of education?
- does the franchisor consider the franchisees’ financial net worth in their decision?
For some prospective franchisees, the selection criteria may seem onerous. However, the selection criteria signal the need for both expertise and capital needed to operate the franchisees.
Franchisors without clear selection criteria may be willing to enrol individuals into the system without due process, which can destabilize the complete system. Having competent peers is beneficial to everyone involved. The selection criteria also provide some guidance on the franchisor’s expectations.
Franchisor ongoing support
Franchisors can provide ongoing support in different ways. Some of the questions that franchisees can ask on ongoing support are:
- does the franchisor organise regional or national meetings? How often are these meetings scheduled?
- is there a franchisee association? What’s the role of the franchisee association?
- does the franchisor offer field training before the opening of the outlet? Is this training mandatory? How much does it cost?
- does the franchisor offer annual field training? Is this training mandatory? How much does the training cost?
- is there a franchisee newsletter? Do franchisees contribute to the newsletter?
Opportunities to engage with other franchisees on an ongoing basis can contribute to franchisees’ success and well-being. These ongoing connections with the franchisor and other franchisees’ in the system provide an opportunity to learn and share best practices. Both formal and informal exchange of information has favourable implications for franchisees and franchisors alike.
Individuals taking a cautious step towards entrepreneurship should carefully consider various franchise opportunities in the marketplace. Asking the right questions can help franchisees succeed in the right franchise system.
This is an opinion piece by Dr. Sudha Mani. She is a Senior Lecturer at Monash University and Member, ACCC’s Small Business & Franchising Consultative Committee. Her expertise is in the area of governance of franchisor-franchisee relations and their performance implications. Dr. Mani applies advanced econometric methods to work with big data. Her research has appeared in highly prestigious Financial Times top 50 journals. She has contributed to the Australian Parliamentary Inquiry Committee's report on the Franchising Code of Conduct and was a keynote speaker at the National Franchise Convention 2019.