It’s easy to get excited about a new business idea. However Greg Nathan, founder, Franchise Relationships Institute, is keen for potential franchisees to give serious thought to whether a franchise is the best move for them.
“It’s an employee’s market at the moment, with employers scrambling to find quality people and prepared to pay record wages with never before heard of conditions around flexibility and benefits.”
Before you buy a franchise be sure franchising is right for you
He suggests anyone considering a franchise asks themselves these questions:
- Do I really want to leave these attractive conditions and take on the risks of running my own business? If so, why? What am I looking for?
- If I do take on this franchise, what specifically do I want to achieve and what’s my time frame?
- And how do I ensure my family is on board to support me in this adventure?
Bruce Billson, Australian Small Business and Family Enterprise Ombudsman, also believes it’s important to consider what franchise system might be a good fit for you.
“What offers the support you are looking for, provides a business opportunity that can cope with rising costs such as wages, interest rates, energy costs and other key inputs, and can adapt to how customers might respond to cost-of-living pressures, which are all expected to increase in the year ahead?”
Greg also suggests looking beyond the slick marketing material to find out how franchisees really feel about the brand, and how they have performed in comparison to independent operators.
Do your own homework
Bruce reiterates the importance of doing your own homework. A rule of thumb is to apply one hour of due diligence for every $1000 you will invest.
Prospective franchisees should also check out the Franchise Disclosure Register, he advises. This is where franchisors provide basic information on their brands.
“The register is a free self-service tool to help prospective franchisees make informed decisions. You can search, view and compare information,” he says.
Seek expert advice before you buy a franchise
“It is vitally important to get good legal, commercial and financial advice before making a commitment,” says Bruce.
Seek advice from individuals and firms that are well-versed in franchising so they understand the nuances involved.
Franchising is a regulated sector, so there are rules to obey in terms of franchise documentation, and good faith.
You’ll also want to know if this business is viable.
Do the preparation
So don’t forget to do the financial basics, says Kate Groom, director, Franchise Accounting and Tax.
There are three important considerations:
- cash to invest in the business
- a credible business plan
- proven profitability
“Franchise buyers will need cash to invest in the business. It’s still possible to borrow money to finance a business; however, you need cash because lenders expect you to have skin in the game and to reduce the burden of interest payments,” says Kate.
Creating a business plan will help you understand the business, identify risks and how to manage them.
“Banks look for evidence of a borrower’s ability to run the business profitably, and so should you,” says Kate. “Even in a franchise, you can’t afford to just hope for the best. Franchise buyers need to obtain evidence that the business can operate profitably in current market conditions.”
Find more information about the research process and key documentation here, or choose the easy-listening option with our Buying a Franchise podcasts.