Despite the fact that some franchises have made the headlines for all the wrong reasons this year, many people still believe that owning a franchise is the ideal way to go into business. Franchising contributes more than $144 billion to Australia’s economy and the sector employs almost half a million people.
There’s every reason to believe in the dream. After all, you’re buying into a pre-existing and well-established model; there’s a head office that makes or builds the product and where you can go if you need advice; plus, you’re able share in their marketing collateral to promote your franchise. What could possibly go wrong?
The answer, unfortunately, is plenty. According to research conducted by Griffith University and the University of NSW, not only do 10 percent of new businesses close at the end of their first year, but a large proportion of franchisees never seek independent financial advice before purchasing their franchise.
However, due diligence pays dividends.
Ask yourself how much you know about the product you are investing in. Do you like it and do you really want to work with it? Is it sustainable – you do not want to take charge of a business that will work in one State, but not in another, for example, or will be supplanted by a brighter, better version within a few years. Similarly, how easy is delivery of the product – can you buy it locally, online? Many franchisees have lost out because of supply chain problems.
Be honest: are you confident that you will be able to take charge of the business from A to Z? As a small-business owner, you are ultimately responsible for HR, IT, sales, marketing, financials and more. Do you have sufficient business experience to take on this enormous task, or access to advice and resources that will support you? You may be a good salaried executive but that does not mean you will necessarily make a good business owner. And you have to like the people who will become your customers and staff. If you’re not a people person, a franchise may not be for you.
Get to know the franchisor. The best franchisees originate from good franchisors. Not only do they want to bring in the best people into the business, they understand that if their franchisees make money, so will they. So they willingly reinvest in staff, equipment, marketing, because that is part of the franchise’s growing success.
Read the Franchise Agreement closely, and if possible, enlist legal help to scrutinise the fine print. It’s important to understand your ongoing obligations. What fees must you pay and what do you get in return? How often will equipment be maintained and upgraded? What will motivate the franchisor to assist you? Before you sign your agreement, make sure you understand what you are signing up for. If necessary, enlist the hel p of the Franchise Council of Australia – www.franchise.org.au. Their website contains a great deal of relevant and important information to help you keep on track. As an FCA member, you will be able to access courses, events, publications and other opportunities that will help you get the most out of your franchise.
If this all sounds daunting, don’t be put off. Franchising remains a great way to build a business. But like all businesses, look before you leap and do your homework first.
Leanne Hegarty, Partner, KPMG Enterprise
