Doing your franchise due diligence

Doing your homework before deciding to buy a franchise can help you identify the right sort of franchise to buy – or avoid. By Michael Schaper.

LET’S ASSUME that you have been searching for months and you have found the perfect business to buy – it’s a well-located franchise outlet that is part of a popular chain.

The price sounds reasonable and according to the disclosure document and other information you’ve been provided, the business appears to be in good financial health. But how do you find out what’s really going on inside the company?

Franchisors are unlikely to talk down their own business or highlight potential problems upfront. While they are required to disclose relevant financial information, there is an additional source of valuable information that is too often overlooked by those looking to enter a system – other franchisees already working in the business.

Valuable insights

Owners of other franchise outlets can provide valuable, unvarnished insights into what it’s like to work in a business day in and day out – observations that that will not be apparent from just reading the paperwork.

After selecting a franchise that matches your interests and reading your disclosure document, franchise agreement, and any other agreement carefully, the next important step should be to seek out as many different franchisees as possible, including those that have recently left or not renewed their agreements.

Under the Franchising Code of Conduct, franchisors are required to provide you with the contact details of franchisees who have left or did not renew their agreements in the past three years, unless those franchisees requested that their details be withheld.

Seek out these people and ask them why they left, but keep in mind that some franchisees who fail may have a tainted view of the franchisor, even if the reason they were unsuccessful could be due to their own performance in running the franchise.

Next, try to speak to franchisees still in the system. They may have a different perspective to those that left. Ask them how happy they are working in the business, and whether it has met their expectations. Running any successful business can be hard work, and most franchisees also work in their outlet as well as run it.

Running a busy café might seem like an attractive alternative to your current job, but it can also be tiring, repetitive work. If you can’t see yourself standing behind a coffee machine all day long it may not be the right choice for you.

Try to find out how much work is involved in running the business. After working all day, many franchisees then have to take the books home in the evening as well. Factoring in time for stock ordering, accounting, organising staff rosters and payroll can significantly add to the total number of hours required every week.

Earnings

A credible franchisee should be willing to discuss how profitable they have found the business. It’s not uncommon for many business owners to draw no or little salary for themselves for several years before they start to make a profit. Find out what other franchisees are earning from the business, and compare that to what the franchisor has told you.

One of the main benefits of joining a proven franchising system is that entrants are usually provided with training. However, some franchisors provide much more comprehensive training than others. Ask the franchisees you speak to what they thought of the training they received.

Likewise, ask what sort of support they receive from their franchisor. A good franchisor understands that their own success depends on the success of their system, but not all provide adequate support. This is particularly important for first-time franchisees who may need extra assistance in the early stages.

Franchising agreements also usually contain some form of commitment to advertising. Check with the franchisees how well the franchisor promotes the business and whether they stick to the promises made in their contracts.

From time to time disputes can arise. Find out what sort of track record the franchisor has when it comes to dealing with problems and what sort of procedures they have in place to address disputes.

Finally, consider the possibility that one day you may wish to on-sell the business. Check what your rights are under your franchising agreement. Also ask those who have already done so how easy it was to sell and what sort of return they received on their investment.

Dr Michael Schaper is a deputy chairman of the Australian Competition and Consumer Commission. www.accc.gov.au

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