How to pick a top franchise opportunity
With around 1120 franchise systems in Australia, where do you start to seek out one that is perfect for you?
The obvious place to begin is to calculate your initial entry-level investment. A common pitfall is for potential franchisees to ignore or underestimate the need for working capital to support the establishment phase of the business. An accountant can assist in assessing this amount as everyone’s situation differs.
Once you are clear on how much money you have to spend, online research is a good next step to see what types of franchises are available and the required investment level.
Most franchises advertise on social media platforms in addition to being featured on the major franchise websites, such as FranchiseBusiness.com.au, in the ‘for sale’ section. Search engines will display a myriad of franchises for sale when prompted.
There are business brokers that specialise in franchises for sale, although their franchises tend to be in the higher investment brackets.
It can be prudent at this point to seek advice from a franchising specialist to provide guidance in the different types of franchise systems available and the pros and cons of the system, as franchising can be a minefield for the uninformed.
In Australia, franchising is regulated by the ACCC. The Franchising Code of Conduct is a mandatory industry code which serves to protect franchisees and provide security within a franchise. A franchising expert can help you navigate the process and assess your substantial outlay.
You will be advised to consider:
- The entire investment, in terms of franchise fee vs set-up, fitout and stock costs. An initial higher investment level can reflect the level of potential return and profit or the fact that the fitout costs and initial stock are costly. The Griffith University 2016 Franchising Australia report indicated the average retail startup cost to be $287,500, with a franchise fee of $31,500. Non-retail startup costs were $59,750, with a franchise fee of $28, 000.
- Is a franchise on a permanent site appealing? Leases, outgoings and restrictions need to be considered, and sometimes a mobile or home-based business may be more attractive.
- Are you risk averse or prepared to spend more to possibly gain much more?
- Do you want to buy an existing business or start in a new territory or site? An existing franchise will usually be bought from the existing franchisee directly. There will be a fee for the franchise plus the goodwill component and stock and equipment where applicable. The franchisor’s approval will be needed for your application, even though the franchisee will be eager to sell. Buying an existing franchise is a complex process and expert advice is highly recommended.
- Do you wish to work part time, flexible hours or full time?
- You are your own boss and are responsible for your success, providing that the system you are in is not flawed. A flawed system is one where it is challenging to derive a profit. A franchising expert can assist in establishing the merit of the franchise.
- Do you want to buy yourself a job or run a business? There is no wrong or right answer to this, but it is important to be clear from the outset. If you buy a lawn mowing or handyman franchise, for example, it is usual for the franchisee to be hands-on.
- Do you want to include your family in the franchise? The idea of providing work for your offspring could be attractive or – on the other hand – a nightmare.
- Be clear on why you are buying a franchise. Just because you love coffee doesn’t mean that you have to buy a cafe. Be realistic, not romantic, about the industry and business you are considering entering.
- Do you want to have a business in a shopping centre? While there’s no denying the attraction of having continuous passing trade, but you could find yourself beholden to a shopping centre god and a franchisor god. Is one god enough?
- Avoid the trap of falling in love with one brand. Many franchisees buy from the heart, commit to research on only one brand from the outset and regret the decision later. Shop around in the same industry and explore other industries too. Experience is rarely needed in a chosen field and training is given, so be brave in seeking “outside the box” options.
- Beware parting with any prepayment that isn’t 100 per cent refundable before the disclosure document and franchise agreement have been provided. Seek expert advice before handing any money to a franchisor.
Once you have found your perfect franchise, you need to undertake due diligence and research. Don’t feel pressured to rush the signing and payment process. By law you have a minimum of 14 days before you can sign and pay but remember it is a minimum, so you can take as long as you need.
Before committing to a franchise you need to:
- Feel confident that you have the right personality type to be part of a franchise system. While you are certainly your own boss in a franchise business, you need to accept that the franchise model will offer a tried and tested system which you should follow. It is likely that you will be restricted to the types of product and services to be offered. Can you live with this?
- Shop around for finance and have the acceptance in place before you get to the stage of appointing franchising advisers.
- Be provided simultaneously with a current disclosure document and specific franchise agreement by the franchisor for thorough review. Despite the Franchise Code of Conduct’s clear directive with this process, it is common practice for a prospective franchisee to be issued a draft non-specific franchise agreement. An adviser cannot provide an opinion without the specific finalised documents.
- Contact current franchisees and former franchisees and ask for their experience in the franchise. Their contact details must be provided in the disclosure document. You have the right to contact anyone you wish to contact, not just names given to you by the franchisor. It is standard for the franchisor to notify the franchisees prior to your contact so that the franchisee knows you are a bona fide approved prospect.
- Become a detective. If you are buying into a well-known brand, ask everyone you know for their thoughts and opinions on the brand, the service, product and general customer experience. Google the brand and research any adverse news reports or glowing recommendations.
- Research your territory or site. If you are responsible for selecting your own site premises and are not being provided with the franchisor’s assistance, this is in itself questionable. Reputable brands are experts in site selection and have the experience to guide or even insist on a suitable site. Site selection can be onerous and some franchisors steer away from being involved. There are mapping companies that specialise in franchise site selection and an expert opinion should be sought to ensure you select the best possible position. Location, location, location is paramount in business and real estate.
There are many high-calibre, ethical and successful franchise systems in the Australian marketplace, so take your time to find that perfect franchise for you.
Carolyn Dufton is an experienced franchisor and franchise consultant. Formerly a franchisor for 10 years, she now runs Maggie Moo Music. As a consultant, Carolyn is focused on best practice, and evaluates franchises for potential franchisees.