People who think buying into a franchised business is a fast track to easy riches are deluding themselves, according to a Brisbane lawyer with expert knowledge of the risks.
Media horror stories of people whose lives have melted down through a collapse of their franchised business prompted Brisbane franchise lawyer Spencer Slasberg to produce a survival guide for franchisees.
Spencer, a member of the Commercial Litigation Team with Bennett & Philp Lawyers, has compiled a Top 10 advice list aimed squarely at people thinking of getting into a franchise and he pulls no punches with his advice.
“It’s the nature of the franchise world. It can be tough especially for people with no business expertise who go into a franchise expecting to be spoon fed. If they crash and burn, that’s when fingers are pointed everywhere, except usually inwards.
“Yes there are examples of franchisors who behave in an underhanded manner and shortchange their franchisees, but that’s not the general rule,” he says.
Spencer believes before people contemplate committing to a franchise they should consider 10 key points:
- A franchise is not a business with training wheels. People who want to get into business for themselves often think they are buying into a system where a franchisor is there to guide them through running a business. That is not the case. Franchisors are not there to train franchisees on how to run a business. Good franchisors may offer mentoring and training sessions on brand and systems, but without at least some basic business skills novice punters are bound to struggle.
- Read the material! Franchisors have pretty heavy regulations on the amount of information concerning the franchise structure they have to provide you before you even sign up. They even have to leave you alone for 14 days after giving you the information before they can start putting pressure on you to sign up and start paying. It can often look pretty daunting, the amount of information they provide you, but it is your best chance to get a snapshot of the business and know which direction to make any further inquiries you have before committing to the investment.
- Do some research on the business and your proposed area. Particularly in retail and hospitality franchises you are committing to a particular premises or restricted area of operations. During your cooling off/disclosure period, have a look around that area. See who your main competitors are. Do they look busy? Why are they busy or why are they quiet? Ask questions of everybody. You should be given a list of other franchisees (even if you aren’t look them up) call them and ask questions. Either a happy or an unhappy franchisee is usually willing to speak about why they are that way. Don’t be afraid to ask, you have a lot riding on this, don’t get shy now!
- Get financial and accounting advice. The disclosure material will contain financial information about the business, invest in some advice very early on to find out what your financial position actually is and what it might be projected to be in the first 24 months. This is where most young businesses fail, because people do not get enough advice on what their cashflows are going to be like until they establish themselves and only account for the initial costs, but don’t consider what life will be like without any real income to speak of until the business gets off the ground.
- If you don’t have any business experience, consider a little bit more education. Plenty of institutions offer diplomas and certificates in business management (often online now too). It might seem like a bit of a commitment but think about doing a business course to get the know- how behind you. This will help you avoid many of the traps of young players and if things start going wrong, will arm you better to decide if the problem is your franchisor or (might sound a bit harsh but…) or if it’s you.
- Try to avoid putting all of your eggs in one basket. Businesses fail, almost 50% of the time and for many reasons. Not just opportunistic franchisors or business partners, and not just because of your own issues but sometimes reasons completely outside of your control or ability to predict. Markets change, tastes and trends change. Can you survive this business failing? Get legal advice about protecting your assets BEFORE you invest in a new business.
- Look at the franchise fee structure and ask why is that so? A franchise that structures its fees based on a fixed percentage of your profits tends to be more committed to your success and confident of getting more money out of its successful franchisees. Franchisors that just charge a flat rate no matter how well or poorly your business runs may not have your best interest at heart. That’s not to say they don’t, but it does raise another question for you to ask!
- Be prepared to work hard early on! People often want to run their own business for the freedom it offers, time wise. Try and think of that freedom at least 2 years in advance. You will only get out of your business what you put in. If you take liberties early on, your business will suffer in those fledgling stages. Work hard and put effort into your business and your staff early on and the business has a better chance of reaching “critical mass” and being self-sustaining while you take your 10 to 30 weeks holiday each year!
- Talk to other franchisees and if offered, join franchisee organisations. This will be your best source of information and support. United you will stand, divided…
- Be committed to the franchise you are buying into or don’t commit at all. Learn their values and their goals and get behind them. You do not buy into a franchise to assert your own ideals. Chances are, you have seen something in a franchise business that connects with you. You are not in this to run your own game, you are committing to someone else’s idea. If you try and run your own play that doesn’t accord with the franchise philosophy, you probably should have just set up your own business. So back to square one again research, research, research, BEFORE you invest!
Spencer adds that when franchisors and franchisees are on the same page and committed to mutual benefit, and understand and appreciate each other, a franchise can be a powerful relationship.
“But self-serving ideas and opportunism can lead to mutual destruction. Be confident of what you are buying into, but committed to the process and your role in it and be informed! You won’t always spot a dodgy franchisor before you get into bed with them, but at least if you put the leg work in first you will be better armed to identify and deal with those issues” he says.