037 – What to look out for becoming a Franchisee

Today we are taking a break from this month’s focus on Phase 7: Expansion.  Instead we are going to talk a little about our Accountant Partnership Plus Program.  That’s a program that gives our accounting partners some information about different areas of the law that will impact their work.  A lot of the accountants have been asking about what they need to know about franchising.

The whole point of a franchise is selling your systems and branding for another person to operate.  A franchise agreement will cover all the details about what you are providing to the franchiser.  The franchiser owns the brand and the system but the franchisee gains the right to use those things.

In Australia there is something called the Franchise Code of Conduct.  This legislation regulates things like what needs to be disclosed and the expectations of the ongoing relationship.  The whole point of the code is to ensure that everyone acts in good faith.  The franchiser has to give a disclosure statement before the signing of the agreement.  It’s very tempting to fill out the disclosure agreement yourself.  That’s very dangerous.  Mistakes can lead to legal headaches in the future.  If you haven’t provided the right information you could end up in years of litigation.

Among the things you are required to disclose include revealing all current and previous franchisees that have been in business with you.  You also have to be clear about all payments that will be required of the franchisee.  There are standard fees that are outlined in the Franchise Code of Conduct.

Another common element of a franchise agreement is the marketing fund.  All franchise members can pay into the fund in order to purchase advertising and other marketing services.  You also need to be clear about what is going to happen at the end of the franchise agreement.  The final thing you need to disclose is all your financial information.  You have to provide access to your books so that that the franchisee knows how much the business is making.

The advantages of buying a franchise is the fact that it is a heavily regulated form of business.  There were many unscrupulous franchisors in the past and the government had to step in to protect franchisees.  Secondly, when you buy a franchise you are buying an established system.  A proven, successful system should be replicable for you.  Finally, a good franchise will have a good brand protected by a trademark along with a successful marketing system.

There are of course disadvantages to buying a franchise.  The first is the most obvious.  Not every franchise is a good one.  There are plenty of examples of franchisors who have not created a good system.  They’re business model is unproven or their systems and manuals may not be in place.  Talk with others that have bought the same franchise.  The cost is another disadvantage to becoming a franchisee.  The franchise costs can be extremely high, sometimes as much as $100 thousand.  You need to look at the financials to make sure that you are buying a viable business.  The final disadvantage is the fact that you have a real lack of control over the business.  The marketing, branding and systems are largely out of your control.

There are plenty of mistakes that people make when buying a franchise.  The first is not reading the documentation.  The manuals, the agreements and all other documents have to be read completely before you sign on the dotted line.   If you don’t understand something make sure you get good advice.  Ask lots of questions.  Another big problem we see is not making sure the franchise is profitable.  We have seen one example where a franchisee didn’t look at the numbers close enough.  All of their profits were going towards franchise fees.  When you look at the numbers reduce your projections by 50% to find out of the business is still going to be profitable.  That all comes down to due diligence.  Ask other franchisees questions about the business.  Does the franchisor live up to their promises?  How hard is the business to run?

We don’t want to scare you off of buying a franchise.  We just want you to avoid the common mistakes so you choose the right franchise.  There are plenty of pitfalls so educate yourself so you don’t fall into one.