But what's the bottom line?
by
Norton Rose
The business concept: The prospective franchisee must be satisfied as to the basic commercial viability of the franchise business.
Franchising is the replication of a proven business concept. It will not save a bad business, concept, product or service. Not only the particular franchised business but also the market in which it operates must be assessed. There must be a proven demand for the product or service. The concept must have a proven capacity to attract consumer support. The business must be distinctive.
The franchise system: The manner in which the proven concept is replicated by franchisees must also be sound and viable. The franchise system is the total package of services provided, and all the business conditions imposed, by the franchisor covering all aspects of the franchising relationship. A proven and attractive concept will fail if the internal aspects of the system are unsatisfactory.
The franchisor: A franchisee enters into a long-term and interdependent relationship with the franchisor. The initial and ongoing commitment, support and assistance of the franchisor will be a key factor in the success of the franchised business. You must carefully consider whether the particular franchisor is one with whom such a significant long term relationship should be forged. The franchisor's track record and experience, commitment, and future plans are among the factors that must be assessed.
The franchisee: In addition to diligently assessing the franchise opportunity the prospective franchisee must also carefully assess his or her attitudes, capabilities and long term goals.
The franchisee operates the business under the licence from the franchisor and must accept significant restrictions on independence and business freedom. If you are not prepared to adhere to the franchisor's system and to accept the franchisor's guidance a franchise is not a sensible investment.
The bottom line: There is of course a further key factor – the bottom line. The prospective franchise must be satisfied that the investment will be profits The Disclosure Document and the Franchise Agreement will provide some, but not all, of the information needed for assessing financial viability.
Franchise fees and marketing fund levies must be disclosed along with details of establishment costs necessary to commence operating the franchised business. However the information which most prospective franchisees not surprisingly most want may not be provided. Of the 200 plus items of information covered by the Disclosure Document the only optional information is Earnings Information which need not be provided.
If earnings information is given it must be based reasonable grounds and, if a projection or forecast, must include the assumptions on which it is made. If not provided the franchisor must include a statement to this effect in the Disclosure Document stating that "Earnings may vary between franchisees" and "the franchisor cannot estimate earnings for a particular franchise". These statements reflect the reality that factors such as location, capacity and commitment the franchisee and changing demographics of the will impact on future earnings.
However the franchisee's interest in receiving earnings information is countered by the franchisor vulnerability to a misleading conduct action in respect of information provided. While franchisors will not, quite reasonably, provide projections many provide historical data cut and sliced in various ways. This data will invariably be accompanied by disclaimers, qualifications and other contractual devices to make it clear that the information is provided for guidance without a guarantee.
This information is nevertheless valuable to prospective franchisees and provides a starting point for due diligence and informed financial advice.
Andrew Terry, Australian School of Business at UN, and Special Counsel to legal advisory, Deacons
Deacons is Australia's leading franchise law firm, with offices in Melbourne, Sydney, Perth, Brisbane, Canberra and in 11 locations in Asia. We have assisted over 200 franchise companies, from large international corporations to start up franchisors. We do not handle franchisee matters.
This article appears courtesy of Franchising Magazine. 20.06.2008
FCA Member
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