Buyers of franchises are normally risk averse. That’s why they go for a proven system and choose a business format that involves support, systems and guidance from a proven performer – the franchisor.
The enigma of franchising is that such a risk averse buyer, with no experience or track record and no useful guidance, will often end up paying many hundreds of thousands of dollars for a business that itself has no track record and no reliable pointers to future success – coming to the decision to buy by relying only on that famous brand, the success of others, or the franchisor’s representations.
Early on, a buyer should hire the services of a lawyer and accountant (and maybe business advisor/broker) who each have experience in franchising. If at all possible – but depending on experience, of course – a buyer should make the decision on their own, rather than relying on professionals to make it for them.
Franchisor financials
The purpose of this line of inquiry is firstly to determine whether the franchisor is going to be around in a couple of years’ time when the franchisee may be looking to recoup their investment. Secondly, its purpose is to determine whether the franchisor can afford to support the franchisees. If the franchisor fails, then the franchisee surely will as well.
The Franchising Code of Conduct, administered by the Australian Competition and Consumer Commission (ACCC), makes it mandatory for a franchisor, during disclosure, to either provide financials or have an auditor make a statement as to the solvency of the franchisor.
Franchisee profitability
This is potentially the first inquiry you will make. While most franchisors have a process of recruitment that will offer you access to franchisees within the network, there is nothing really to stop you approaching franchisees yourself to find out how they are going
Royalties
Whilst franchise businesses are generally thought to be safer for the reasons set out earlier in this article, they can actually be riskier if the royalty payment doesn’t deliver an advantage to the franchisee.
Remember that the franchisor gets paid out of revenue (sales), not profit.
Potential franchisees should consider visiting the buying a franchise and running a franchise sections.
The Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.
10-Jun-2008