Don’t think twice Think long and hard!

The Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.

Timothy Brown was a happy, country-based highly successful businessman with interests in wool selling and land brokerage. So impressed was he by a franchise brand and feedback from the four or five franchisees he spoke to, he didn’t hesitate to buy it. From day one he was working 60-hour weeks and losing control of his other business commitments, not to mention his personal life. Only one month into the franchise and his dwindling self-esteem got the better of him – he suffered a physical breakdown. Although the franchise was making money, he just couldn’t cope personally. Twelve months later he sold the business.

This is an all-too-frequent scenario for many new franchisees, says Franchise Point managing director, Michael Anthony. They do their due diligence on the business itself, ask all the right questions, but forget to audit their own personal circumstances and responsibilities.

“People generally get into franchising because they are looking to make a seachange, but forget to ask themselves the inevitable question: why do I want to make the change and what do I want to make the change in?” he says.

According to Anthony, the real potential horror story is when someone who is used to working in a shirt and tie chooses to buy something like a mowing franchise. It’s the typical round peg trying to fit in a square hole scenario. It’s not going to work.

Nickolas James, franchise adviser at Franchise Central, claims to hear at least one story a day like this.

“Just because you might be unhappy in your current environment doesn’t mean you have to change your lifestyle and pay for it to make it happen,” he says.

Don’t fall into the trap of buying on emotion, Nickolas James.

“People are easily influenced by what they see others achieve and find out six months to a year later that they want to get out,” he says. “A coffee franchise might be trendy right now but do you really want to work seven days a week and spend less time with the family? Our business is to match the right business to the franchisee, help them make educated decisions and deter them from buying on a whim.”

Ask yourself the hard questions, Anthony adds. Is it logical to buy a bakery when I have a six-month old child at home? How will my life be affected if I work seven days a week? I’m leaving my job, borrowing against my home and I’ll be starting off earning less than what I did when I worked five days a week. Is this what I want? Franchisees need to visualise their lives in every scenario and admit the truths.

“It’s something we see around the country every day – people forget to ask themselves the obvious questions,” he says.

Another common mistake is over investing. It can totally destroy a franchisee emotionally and financially and even cause a marriage to break up.

James advised a husband and wife duo to sell a franchise because of such a mistake. They had bought a café franchise because they were drawn in by what they perceived to be the fun lifestyle associated with it. The husband was a white-collar worker and the wife in retail – what they thought to be a perfect mix of business sense and customer service experience. They invested well over $300,000 into building the site. The combination of working seven nights a week and managing staff for the first time took a toll on their personal lives to the point that the couple almost split up. They threw away close to a $415,000 investment for a year’s experience they shouldn’t have got into in the first place.

Franchising is not necessarily for everyone, Michael Anthony emphasises, stating that there are six core criteria why someone should never buy a franchise. If your answer is yes to any of these points, then your values won’t match that of a franchise system.

s I like to do it my way

s I hate team work

s I don’t like systems

s I fear change

s I can’t lead by example

s I’m sometimes lazy

Of course, franchising is by no means ‘doom and gloom’ – it’s about making educated decisions and being honest with yourself. Eric Morgan of Franchise Developments says if you do ‘serious’ homework and take at least two months to do so, as well as evaluate your personal needs, you will make a wise choice.

Once you’ve ticked every box against your personal criteria, it’s time to choose a system. However, there are over 850 franchises on offer in Australia, so how do you choose one that’s right for you?

Deacons Consulting managing director, Rod Young, says you can quickly weed out 98 percent of franchises and reach a shortlist quickly by starting with a blank piece of paper and asking yourself the following questions:

s How much can I borrow and how much should I put into the business?

s What’s my profit expectation?

s Is it located close to home?

s Do I want to employ staff?

s What support am I expecting from my family?

s How many hours do I want to work?

s Do I want to deal with people every day? (i.e. retail franchise)

People need to satisfy their own personal criteria first and not be swayed by friends or other franchisees’ enthusiasm for their businesses, Young says. It is important to recognise that they are enthusiastic and satisfied because they have met their individual criterias.

“It’s also the little things you have to remember before choosing a franchise,” Young continues.

“If the business is more than half an hour drive away from home then it’s not only inconvenient, it means you’re not part of the community and on top of local issues. It sounds like a minor thing but some franchisees think that buying a franchise is like purchasing a one-way ticket to profit. They forget they have to work to earn – the business doesn’t work itself.”

Being overoptimistic about return on investment is a common mistake franchisees make, Young adds, and it starts with an overoptimistic business plan.

A typical scenario which illustrates this is a potential franchise buyer who, after speaking to half a dozen franchisees, which were handpicked by the franchisor and each one reporting back a turnover of $10,000 a week, the franchisee automatically thinks he or she can too and builds the projection into the plan. This is where the franchisee makes a fatal error, Young says. The new franchisee didn’t factor in the amount of work those franchisees are actually doing to achieve this turnover.

Then the franchisee borrows against the home at the maximum of his or her borrowing ability without building in a contingency for a quiet year. The plan is to start making money from day one. The franchisee gets into the business and sales don’t start off as well as anticipated. From here on things get more complicated, Young explains, and before the franchisee knows it he or she is shelling out money for marketing which wasn’t factored in the business plan in the first place and suppliers are refusing to deliver goods without payment on consignment. At this point the franchisee is personally deflated and the business is in such financial disarray the only solution is to sell the business. The franchisor buys the business back which covers just enough to pay back the bank loan and the franchisee leaves the network bitter and feeling humiliated.

“The moral of this story is to have enough working capital behind you before you start,” Young says. “Expenses always come up when you least expect it. You never know when a shop window is going to crack and you need to replace it.”

In this particular case, though, the problems started when the franchisee rang the franchisees recommended by the franchisor. Franchise Alliance principal, Phil Blain, says this is the last thing a prospective franchise buyer should do. He suggests potential franchisees take the trouble to ring every single franchise in the entire organsiation, and if possible, the ones that have left as well. Ask them how they are being supported, if they are regularly visited by the franchisor, and if there’s value for their royalty or management service fee.

“Even if the franchise is international, don’t be afraid to call franchisees overseas. If eight or 10 contacts from the entire organisation say they are making money, that is they are drawing at least a 25 percent return on their invested capital, not including wages, then you’re on the right track,” Blain says.

He stresses how imperative it is for franchisees to work with an accountant or lawyer that is specialised in franchising. Don’t just go to the lawyer who helped with your property exchange contracts.

“Just because they’re a lawyer doesn’t mean they’re specialised in franchising,” he emphasises. “Think of a professional adviser as an investment for the future, not a cost.”

Interestingly, one of Blain’s clients wavered his rights under the Code of Conduct. Under the Code a franchisee is expected to seek advice from a solicitor and a certificate to prove they have seen one, then show the franchisor. This franchisee, however, decided not to so as to save money and wrote a waiver letter to the franchisor. After they entered the agreement the franchisee discovered extra expenses in the lease that he didn’t know about. In the end he was $10,000 worse off, which could have been avoided if he had sought proper legal advice.

As Eric Morgan of Franchise Developments says, people sometimes get caught up in the notion that everything is going to be fine. Following your intuition alone is not going to save you when things go pear-shaped. That’s why there are professionals that can help you avoid mistakes.

Blain says franchisees tend to forget that when they’re buying a franchise they’re buying into a proven model.

“If you’re going to paint the Golden Arches red then you’re not suited to be a franchise,” he says.

Don’t be afraid to ask the blue sky questions either, he adds.

“Just because it might appear to be a ‘trendy’ franchise right now, will it be in demand in 10 years time? If a franchisor says they have a unique business you have to ask yourself how big the market is. It’s far better to go for a franchise with a solid market. That’s why food franchises are so popular. Everyone’s got to eat.”

Another mistake people sometimes make (although to some it is obvious) is that the business’s money is not the individual’s money, Blain maintains.

“A client in his first week earned $7,000 and $8,000 in the second. He withdrew the money from the company account to buy a car for himself and didn’t have any money to pay for stock. Inevitably he didn’t survive.”

According to Blain, these days franchise purchasers are generally well informed and astute. Gone are the days when franchisees went to an exhibition and got swept off their feet by a fast-talking American. However, as each franchising specialist interviewed has acknowledged, there are still curly situations which you can find yourself in if you don’t assess your personal situation first, consider the options that fit your circumstances, and ask the right questions before you buy.

As Michael Anthony of Franchise Point muses: “If you’re looking for a business with no competition, no risk and a guaranteed income, save yourself the time, money and heartache. No such business exists.” l