Make sure you’re fully informed before purchasing a franchise, advises Dr Michael Schaper, deputy chair of the ACCC.

Before you buy a franchise it’s important to gather as much information as you can, to help you make an informed decision. The best time to find out whether a franchise system is the right one for you is before you’ve signed a contract or handed over any money.

There are some simple things that you can do to ensure you are as well-informed as possible before entering into an agreement.

Consider the following tools that you can use to discover information about the business:

THE DISCLOSURE DOCUMENT

The Franchising Code of Conduct is a mandatory law which requires all franchisors to give potential franchisees a disclosure document, a franchise agreement and a copy of the code at least 14 days before the franchisee signs the agreement.

The disclosure document contains a lot of the key information about the franchise. It will tell you what payments you’ll be required to make, whether you will have an exclusive territory and what will happen when your agreement ends. It also provides information about the business experience of the franchisor, and whether the business or franchisor is involved in certain types of court actions.

FORMER AND CURRENT FRANCHISEES

Franchisors are required to provide in the disclosure document details of how many franchisees have left the franchise system in recent years. If those former franchisees consent, the disclosure document will also provide their contact details.

It can be useful to investigate why a franchisee chose to leave the system; ask yourself whether you identify with their reasons for leaving, or whether they left for reasons that are unlikely to affect you.

Speaking to current franchisees and visiting their business premises is also an option when researching a franchising opportunity.

Current franchisees can tell you whether the reality of running the business matches the expectations that they had when they first bought their franchise. They can tell you what to expect from the franchisor, and whether they have any concerns about the way the franchise system works.

A good question to ask current franchisees is whether they would make the same decision to purchase the franchise again, knowing what they do now. If they tell you they wouldn’t have purchased the franchise, ask them why. Do their answers resonate with you, or are the issues they raise irrelevant to the way you want to run your business?

If you find yourself identifying with unhappy ex-franchisees, or unsatisfied current franchisees, this may not be the right franchise for you.

COMPETITORS

Searching a business or even phone directory can help you form an idea of who the business’s main competitors are, and how many exist. This is useful information in itself, but contacting competitors directly to ask them what their thoughts are about the industry you’re considering buying into can also help you.

BUSINESS PRESENCE AND BRAND REPUTATION

One of the most valuable things you buy when purchasing a franchise is the right to use the brand reputation of the business. That is, the ability to trade on the business’s reputation rather than starting a business from scratch. It is worthwhile doing some preliminary research to determine how valuable the franchise’s brand reputation may be.

For example, you could do an online search about the business to see if any news articles about it have been published recently. If the articles are generally negative, this might be a sign that you need to carefully consider whether this business is the right one for you.

You should also consider how well advertised the business is. Have you seen or heard any of its ads? If you search for the business online, is it easy to find? A franchisor who puts effort into advertising the business and developing its brand reputation is a person who cares about the health of the business, and who is committed to its continuing growth.

KEEP AN EYE OUT FOR WARNING SIGNS

While researching whether a particular business opportunity meets your personal needs, you should also consider warning signs that the franchise is not genuine.

Ask yourself:

• Is the franchisor claiming you can make very large amounts of money in a short space of time, regardless of your effort or experience in the industry?
• Is the franchisor reluctant to provide you with the contact details of other franchisees?
• Does the franchisor ask you to pay an amount of money upfront, before providing you with information about the franchise?
• Is the franchisor engaging in high pressure sales tactics, pushing you to decide quickly and suggesting if you wait you will “miss out on an amazing opportunity”?
• Has the franchisor sold this particular franchise site numerous times in the past?

Any of these behaviours may be an indication that the franchise itself is a scam, or is otherwise not something to get involved with.

PROFESSIONAL ADVICE AND ASSISTANCE

Performing the research outlined above is critical if you wish to make a truly informed decision about buying a franchise. You don’t need to stop there, though – consider talking to a lawyer, accountant or business adviser to help you process the information you’ve gathered and give you a clear idea of any potential risks.