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7-step guide to buying a franchise

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16 / Nov / 2009

Buying a franchise: where do I start?

Intro: There’s an old saying in franchising: “Franchisors get the franchisees they deserve.” The reverse is also true, as many franchisees continue to make uninformed decisions or waive the requirement for legal advice.  The quality franchisors like Dymocks, Grill’d, Muffin Break, Enzed, Xpresso Delight, and Nandos all share the same interest as a franchisee: a quality operation with quality people.

In the face of 1200-plus franchise systems, variables of new or existing, mobile or retail, B2C or B2B, industry and level of capital investment, prospective franchisees need to make a fully informed decision. This article is not intended to be an exhaustive list of 1+2+ 3 and you are franchising. But for anyone serious about buying a franchise, read on. For those contemplating an easy or passive investment, the best outcome is to consider alternative investment strategies.
Franchising in Australia is enjoying a counter-cyclical upward trend that occurs in any economic slowdown as employees seek the certainty of taking responsibility for their own destiny. The past nine months in Australia have been marked by a significant increase in the amount and quality of overall prospective franchisee interest.

Step one: set your limits

Assuming you have an open mind on the particular type of business you would like to operate, the three key considerations when buying a franchise are:

  • What size of investment can you afford?
  • What are your criteria and areas of interest?
  • Are you interested in a Greenfield or existing franchise?

Tip:  Here, the savvy franchisee will determine what they can afford and then commit to the limit. Just like the rules at an auction, set your limit and stick to it. In any consideration of capital think about the investment capital and working capital and the latter is most often underestimated.

Step two: ask the right questions

You must reduce your list of potential franchises down to a manageable level; say, three-to-five. Take a good look at the list. Do you really see yourself operating any of those businesses for a number of years?

Ask yourself these questions:

  • Does the business present well to you as a consumer?
  • Do you understand the business?
  • Have they proven their ability to secure quality locations or operate in multiple regions?
  • Are current franchisees profitable?
  • Are they seen in the media and portrayed well?
  • Are current franchisees happy?
  • What is the marketing and advertising program like?
  • Do they have strong relationships with the banks?
  • What is the quality of the management and leadership team?
  • Do they have company-owned operations?
  • Do they listen to and learn from their current franchisees?
  • Do they have a clear vision and growth plan?
  • Do they have a good, solid growth history?
  • How good is the induction and training program, especially if you are a novice in the product, service and/or business?
  • How well developed are their management information systems?
  • Do they have a quality management team?

Tip:  Many franchisees get anxious that they are asking too many questions or alternatively ask the wrong questions that do not unearth if the franchisor is a quality system with a strong future. The only stupid question is the one never asked.

Step three: make an application

Most franchisors will ask you to submit a formal application form. Be wary of those who don’t; it’s a sign they don’t care about who becomes a franchisee or they may not fully understand franchising. Take your time with any application. Be honest and forthcoming with information, it’s not in your best interests to mislead anyone about your ability to operate or fund the franchise.

Tip:  A constant recurring issue for prospective franchisees is supplying half-baked information to the franchisor, which makes it very difficult for any franchisor to make an informed decision as to your best interests.  You may be asked to pay an application fee of some kind. Make sure you receive a receipt for the fee and a written acknowledgement that the amount is fully refundable until you sign a Franchise Agreement.

Step four: research, research and research more

There is a plethora of information available and, as the region’s leading franchise specialist, DC Strategy is aware that many franchisees cut short their research in the interests of making a decision.  There are multiple sources of information that should all be cross-referenced and digested. The franchisor, bankers, accountants, solicitors, online searches, location visits, franchisee discussions and Independent Franchisor Reports are but a few of the readily available sources. There are a number of ranking systems or fastest 50-type lists around that need to be taken with a grain of salt. They are a starting point but ranking in particular is totally irrelevant to the decision-making process of the best franchisees. The industry source for detailed reports on the leading franchisors in Australia is widely recognised as www.dcsreport.com

Tip:  Rely on your own interpretation and get out and ask the questions direct as there is no substitute for first hand learning when you are making a decision for the next five years of your life.

Step five: do your own due diligence

By this stage you should have contacted and met with your target franchisors and commenced the meeting process that should be designed to ensure a meaningful exchange of information between franchisor and franchisee over six-to-nine weeks.  Regardless of the information the franchisor provides, you must develop your own view of the financial aspects and legal aspects of the business. Ensure you can answer the questions:

  • Do I understand the revenue, expense and profitability for the business?
  • Do I understand the contents and ramifications of the legal documentation?

Tip:  Always test your assumptions against existing performance in the business and, when it comes to specialist advice, ensure there is a longstanding track record of working with franchisees rather than provide the opportunity for someone to broaden their resume.

Step six: get specialist advice

There are two types of specialist advice that the best franchisees obtain: legal and accounting/financial. A franchisor is required to provide you a copy of the current Disclosure Document, Franchise Agreement and Franchise Code of Conduct and the banking facilities and financial commitment necessitate expert input.

Tip:  You should engage a specialist franchise solicitor, accountant and banker with experience in both business and franchising, to provide expert input. There is no value in engaging a non-specialist. If you are not prepared to invest some money in quality advice, ask yourself why you are prepared to invest in the business at all? Speak direct to a banker that understands franchising to avoid compromising the process.

Step seven: keep asking questions

A quality franchisor will be willing to answer all your questions and provide you with enough information for you to make a fully informed decision. You must be comfortable with every aspect of the business, so ask, ask, ask and keep on asking until you are satisfied.

Any franchisee must understand the responsibility to understand the business and make a fully informed decision. Franchising is not without business risk and the franchisor is not solely responsible for your success or failure. That obligation rests with you as the proprietor of your own business. It will be your job as a franchisee to ensure your franchise is profitable. If you cannot accept that responsibility you are not yet ready to make the transition to being your own boss.

Franchising has created billions of dollars in asset value around the world for millions of owner operators but only you can determine whether an opportunity is the right one.

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