Is there a disconnect between what prospective franchisees want to hear from their franchisor and advisors and what they need to know?

Here are three different perspectives on the franchise buying advice process…

The business

Greg Nathan, founder, Franchise Relationships Institute

What franchise buyers want to hear:

1. You are a perfect fit for this business.

2. Our comprehensive training will show you how to successfully run the business.

3. We will always be here to support you with whatever you need.

4. We have franchisees earning extremely healthy revenues from the word go.

5. It’s been such a pleasure getting to know you – you are awesome.

What franchisors should say:

1. While we’ve identified you have several strengths that will help you to run the business, there are some areas you are going to need to work on. These include….

2. Our training will give you a solid orientation and help you to get started. However you can’t expect to absorb everything you need to know in a few weeks, and you’ll forget some of what we show you. So we need your commitment to review the training and treat running the business as a journey where you’ll need to constantly work at developing your knowledge and skills.

3. Initially we will provide a lot of support, but we need to get you standing on your own feet as soon as possible. So once you are up and running, we will modify our support to match your evolving needs. This means we can allocate our support resources fairly across the whole network.

4. Revenue is not profit, and we are committed to helping you to achieve profitability as soon as possible. The time it takes to reach breakeven and achieve profitability will vary depending on the location and how well you operate the business. In our experience this can range from XX to XX. You should ensure you have adequate cash reserves to draw on if the ramp up time to reach breakeven is on the slower side.

5. Our relationship is going to go through stages. Initially you are going to love us but there will be times we get on each other’s nerves.

You might think we are not providing you with enough support and we might think you are doing things that could put your business and the brand at risk. This is a long term relationship and you have our commitment to always be constructive and honest with us. All we ask is that you to do the same.

In short, it’s all about managing expectations. People also hear what they want to hear so asking prospective franchisees to tell you about their expectations at the end of the recruitment process is also a good idea.

The legals

Jenny Needham, senior associate, Piper Alderman

Buying a franchise can be an exciting time for many people. Many believe that buying a business would provide them with financial freedom and a lifestyle not offered in employment.

Some prospective franchise buyers understand the importance of obtaining legal advice with respect to the franchise documents.

However others choose not to obtain the necessary legal advice. The reason for this may be varied, such as:

1. they believe they understand all the terms of the franchise agreement; or
2. they believe “nothing will go wrong”; or
3. they believe they are saving costs.

For those that do retain the legal services of lawyers, they do so with the understanding and expectation that their lawyers would review their franchise documents and inform them of any onerous terms or conditions contained in the franchise agreement, and negotiate more terms more favourable to them.

Most prospective franchisee buyers are content with receiving this level of service from their lawyers. Many are eager to enter the franchise network and only want their lawyers to perform the function of reviewing, advising and negotiating the terms of the franchise agreement and any of its associated documents.

However, the prospective franchisee’s lawyers should go beyond the mere reviewing, advising and negotiating the terms of franchise documents and include, among other actions, alerting the franchise buyer of the risks entailed, the importance of complying to the Franchising Code of Conduct and conducting due diligence.

Of course a franchisor has very little say as to what type of advice its prospective franchisee is to receive.

What the franchisor is required to tell a franchisee will predominantly be in its disclosure document.

However, a franchisor should be aware of the following:

1. It is required to allow the prospective franchisee the opportunity to seek legal, accounting and financial advice on its franchise documents,

2. It ought not receive non-refundable money from the prospective franchisee unless it has received from the prospective franchisee a written statement that the prospective franchisee has received and read and had a reasonable opportunity to understand the disclosure document and the Code

3. It should ensure that the information contained in the disclosure document sent to the prospective franchisee is true and correct;

4. It should refrain from using ‘sale’ tactics to induce, influence or pressure the prospective franchisee into signing the franchise agreement;

5. It should refrain from asserting pressure on the prospective franchisee to commence operations of the franchise business prior to the prospective franchisee receiving advice in relation to the franchise agreements or executing the franchise agreement; and

6. It should allow the prospective franchisee to negotiate the terms of the franchise agreement so as not to be in breach of the Competition and Consumer Act 2010 (Cth) and Australian Consumer Law.

The financials

Kate Groom, co-founder of the Franchise Accountants Network

“Should I buy this franchise?” I’ve never been asked this by a franchise buyer. They don’t want my opinion, they don’t want me to tell them how great it’s going to be, or how bad an idea it is. What they want is an independent person to ‘do the numbers’ without the filter of an excited buyer, a sales oriented franchisor, or a risk averse friend.

Take Anna, for example. By the time she called me she had met the franchisor, received the disclosure document, and spoken with her family about the business. The franchisor had provided financial information from company owned locations. Clearly, Anna liked the business and could picture herself in it.

Why did she contact us? Anna wanted help to answer two key questions: “What are the expected costs to run the business?” and “What sales must I achieve to cover my costs and make a decent income?”. She was also interested in an independent perspective on the financial risks and what questions she should ask.

Advisers are often inclined to give an opinion on a business. However, it’s my experience that a franchise buyer isn’t really looking to their adviser for another opinion. Rather, what a franchise buyer wants from a franchise specialist who advises them on the financial aspects of the purchase is clarity.

We deliver clarity when we lay out the numbers in an orderly way, provide a clear statement of any risks or concerns we have about the deal, and list questions to ask the franchisor and other franchisees. And with so much emotion in the buying process, this can be a breath of fresh air.

Don’t sugar coat the facts!

There are some facts that franchisors should give franchise buyers, even if you think it’s risky. Time after time we are asked “How can I work out the numbers?” … And it’s often a best guess because franchisors don’t provide enough information.

So, a franchisor should provide recent facts about the sales and expenses of franchisees (or company businesses if you don’t have a franchisee yet).

And yes, that should include the poor performers as well as the rock stars. It should also include the actual sales in the first two years.

Your buyer wants to know this. How can they make an informed decision without it?