The franchising sector has been expanding rapidly in Australia and the number of new franchises keeps rising. It is becoming harder to attract franchisees because of a larger choice of businesses.
Some franchised businesses can be attractive to people because they pose less risks associated with operating a business, which would be completely unknown to the public. People can often find that a franchised business is a way of operating a business that consists of "tried and tested" products, systems and procedures, guaranteed suppliers and a brand name that has already earned recognition in the growing market place.
However, before entering into a franchised business, it is critical that prospective franchisees do their homework.
Some considerations to assist potential franchisees in their research
The most effective way of assessing a franchisor is for a prospective franchisee to conduct their own research on the franchise system and approach existing franchisees of the franchised business to ask them questions on their experience of being a franchisee and to find out if the franchisor provides sufficient assistance to them to successfully operate their franchise.
Prospective franchisees should conduct their own investigations to answer the following questions:
- What competition is there in marketing the goods or services in the designated territory where your franchise will be located?
- Is there a demand for the goods or services offered by the franchised business in the area where your franchise will be located?
- Is the franchisor's brand well recognised and reputable?
- Is the demographic information provided by the franchisor sufficient, or do you need an independent assessment?
- What do company searches, litigation searches, trademark searches, permit searches reveal about the franchisor?
- Is the franchisor is being sued or is threatened with legal proceedings? Its brand name, its reputation and your investment may be at risk.
- If the franchisor does not own the intellectual property that makes its business successful, who owns it?
- Does the Franchisor have any plans for expansion? Does the franchisor intend setting up another franchise in the area that will compete with your franchise for business?
- You should ask the franchisor to clearly explain its plans for expansion.
- Will your lending institution lend you enough funds to both purchase the franchised business and to satisfy all the capital and cash flow requirements? You should ensure that your lending institution will lend you not only the initial sum required to purchase the franchised business, but also funds for all the capital requirements of the business.
Business Plans and Budgets All prospective franchisees should prepare a business plan and appropriate budgets, with the assistance of a qualified accountant who is experienced in franchising.
The franchisor is under no obligation to forecast what financial success a prospective franchisee can expect and will typically avoid detailed discussions on this topic. However, some large franchisors will provide a prospective franchisee with estimates on what the franchisee's future earnings maybe but these are based on generalisations and numerous variables. These figures will only be indicative and may not necessarily reflect an absolute and reliable account of the likely earnings for each franchisee.
Essential Documentation The Franchising Code of Conduct (Code) provides that it is mandatory that each franchisor provide to all prospective franchisees the following:
1. a disclosure document compliant with the Code;
2. a draft franchise agreement; and
3. a copy of the Code.
The above 3 documents must be provided to a prospective franchisee at least 14 days before a prospective franchisee agrees to sign or signs a franchise agreement or makes a non-refundable payment.
Typically, the franchisor will require that a prospective franchisee advises the franchisor in writing that they have read the franchise documents and received independent legal, accounting and business advice. If a decision has been made not to obtain that advice, the potential franchisee will be asked to sign a statement indicating this.
Prospective franchisees should also consult an accountant about what fees are payable under the franchise agreement and whether or not they can be met from the gross turnover of the franchised business. Once again, it is highly advisable that the accountant retained to assist in buying a franchise has franchising experience.
Further, potential franchisees will also need the services and advice of a lawyer specialising in franchising. The lawyer will need to review the franchise agreement and disclosure document and make sure they contain no hidden provisions that might disadvantage or mislead the prospective franchisee into entering into the franchised business.
Cooling Off A franchisee has a 7 day cooling-off period from the date the franchise agreement is signed. However, a similar cooling off period does not apply when the franchise agreement is renewed, extended or transferred. If the franchisee decides not to proceed, the Code requires the franchisor to refund money paid under the franchise agreement, less a reasonable amount retained for its costs.
Conclusion
It is essential that any potential franchisee conducts their own due diligence and obtain proper professional advice before committing to a particular franchise system. However, once you have signed the documents and have entered a particular franchise - be prepared to follow their system.
This article appears courtesy of
Mason Sier Turnbull.
14-Aug-2007