A franchise is an excellent way to get into business.

But before you get to open the doors to your store, or van, there are steps to take to ensure your best chance of success.

“There are many examples of owners who have been in the sector for some time and built up a considerable business, going from one location to two, three or more,” says Ian Watt, Westpac’s senior business development manager – franchising for NSW & ACT.

But success is not guaranteed. And, once you’ve signed a contract with a franchising system, it can be difficult to walk away without losing money.

“You could be in danger of losing your home if it doesn’t work out,” says Robert Toth, a partner and accredited business law specialist at Marsh & Maher. “There’s a lot you need to consider before you make that commitment.”

Is a franchise right for you?

Not everyone is cut out to run a business; you need to be sure that a franchise is right for you.

“Think seriously about your strengths and weakness,” says Tim Kilham, a director of Lanyon Partners and a chartered accountant who has specialised in franchising for more than 15 years. “You should also discuss your plans with someone you trust to give an honest opinion and who knows you well.”

Many prospective franchisees have little idea what running a business actually entails. They’re often shocked to discover just how hard they have to work, especially in the first couple of years.     

“Any time you can spend working in a relevant business is invaluable, even if you don’t get paid,” says Watt. “You need to be very clear about what will be expected of you.”

A franchise also has implications for your family. They need to know how it will affect them and be willing to give you their full support.

Can you afford a franchise?

Many people assume that a bank will lend money against the franchise.

“This is unlikely unless the franchise is accredited – that is, it has a special arrangement with a bank,” says Kilham. “Even then, the bank will typically lend just 50 percent of the total cost. And the vast majority of Australian franchises – close to 95 percent – are not accredited.”

Banks generally ask for bricks and mortar security. If you don’t have substantial equity in your home or another property, your only option may be to borrow from a friend or family member.

“You must remember that the cost of the franchise is just the beginning,” says Toth. “You will also need enough working capital for at least the first 12 months of trade. You should do your own calculations as franchisors sometimes underestimate this, and that can place franchisees under a great deal of financial stress within their first year.”

Is it the right kind of franchise?

Toth recommends choosing a franchise that draws on your skills and experience. “I’ve seen many franchisees regret their decision to move into a completely different area,” he says. “One went from middle management to a roast chicken franchise and hated every minute of it! Ask yourself whether you can see yourself enjoying the business in a year or two. If there’s any doubt, it may not be right for you.”

Is it the right system?

Some would-be franchisees know worryingly little about the business they would like to buy.

“When I ask people why they chose a particular brand I’m often told they didn’t know there were other brands in the sector,” says Watt.

Other franchisees can be an important source of information, particularly those who have been in the system for two or three years.

“Ask them whether they’re satisfied with the system and the support they get from the franchisor,” says Toth. “Are they enjoying the experience or do they feel they’re stuck in prison?  Are they getting the financial returns they hoped for and expected?”

You can also search for information on the internet.

“Social media and blogging have given everyone a voice,” says Watt. “These days, people are very quick to share their opinion, particularly if things aren’t going well.”

A new business or a going concern?

Buying from a franchisor can be easier than buying from a franchisee.

“A franchisee vendor will have a trading history and financials that need to be assessed, so you’ll have to do due diligence on the franchisee as well as the franchisor,” says Toth. “The franchisor will still have final say on the sale so you will also have to provide the same work and trade history, references and financials. If you do go down this path, it’s very important that you appoint an experienced franchise lawyer to do all of the necessary searches and inquiries.”

If there’s a lease on the premises you should be careful to check the details.

“In general, the less time there is remaining on a lease, the lower the value of the business,” says Watt. “It doesn’t matter how many times the lease has been renewed in the past there’s no guarantee it will be renewed again or, if it is, what rent the landlord will ask for.”

A business that isn’t performing well may seem like a bargain but it may not be easy to turn it around.  

“Remember that the current owner poured savings and assets into the business and has had the same support from the franchisor that you can expect,” says Kilham. “You might well be able to do a better job, but do your homework first and be realistic in your expectations.”

Don’t wait to get advice

If you appoint your lawyer and accountant early you can be sure of getting the right answers to all of your questions as they arise.

“Both should be specialists in the field and, ideally, members of the Franchise Council of Australia,” says Toth. “These are the people with insider knowledge of the good, the bad and the ugly within the industry.”

Anything less that specialist advice could be false economy. “When you’re putting your home and other assets on the line, you can’t afford to take unnecessary risks,” says Watt.

Do thorough due diligence

Franchisors frequently ask for a deposit before they provide information. Under franchise law this is fully refundable, but you should still ask a lawyer to look over the document before you sign it.

“Someone came to see me when he had signed what he thought was a conditional offer,” says Kilham. “He had actually committed himself to buying the business.”         

By now, your lawyer and accountant will be working on legal and commercial due diligence.

“Your accountant is trying to predict how profitable the business will be in the future,” says Kilham. “This will help you to decide whether you should buy the business at all and, if so, how much you should pay.”

You shouldn’t be afraid to make an offer. “Most people presume the cost of a franchise is set in stone but there’s often room to negotiate,” Kilham adds.

Secure your finance

There’s no point in approaching the bank for a loan until you can provide financial information from the franchisor.

“Franchisors will often provide templates for things like cash flow and the business plan,” says Watt. “These are helpful but, ultimately, the success of your franchise will be down to you. The bank will be more interested in your history and your own plans for the business than something you’ve cut and pasted.”

Crack open the champagne

You’re sure the business is sound, that it’s right for you and that you’re right for the business. It’s time to exchange contracts – and to embark on a successful franchising future.