1. Due Diligence – due diligence reduces the risk of going into business! Do your homework by evaluating the quality and value of the commercial potential of the franchise you are considering buying. Take the time to make enquiries and investigate the franchise. Speak to other franchisees and find out more about the franchisor and how the franchisor deals with the franchisees, in particular, how the franchisor/head office deals with the franchisees, does the franchisor encourage and assist or facilitate access to franchisees; how responsive is the franchisor to the franchisee’s needs at induction and the ongoing support provided by the franchisor. Look at the experience and management skills of the directors and offices of the franchise. Remember, every network starts small and sometimes even well-established networks can experience difficulties, retraction or in some cases, collapse. Gather as much information as you can to assess the opportunity and reduce and manage the risk to the very best of your ability.
2. Value Chain – a good franchise proposition is a combination of the franchisor’s product or service, their experience, systems and processes, marketing know-how and brand, which together constitute their intellectual property. The franchisor duplicates and presents this business opportunity to the franchisees to invest in. If the franchisee complies faithfully, the franchise model provides franchisees greater certainty than an unproven concept, reduces risk and offers higher potential growth and realising their enterprise value when they sell. Therefore, a successful franchise is founded on a value proposition that builds enterprise value for both the franchisee and the franchisor.
3. Mind Set – going into business is a serious undertaking and requires mental resilience, hard work and long hours to be your own boss and ensure success. The successful franchise model requires an owner/operator. Franchises are both labour and capital intensive. Don’t be misled by franchise opportunities promoting lifestyle change.
4. Do the numbers stack up? – what is the total investment required and how much can you genuinely afford? How much operating capital is required, to cover rent, staff and your wages, utilities, costs of goods, interest, loan repayments, franchise fees, etc., until the business starts to be profitable. You need to get a business plan for the financial model, preferably a profit & loss statement to consider what the numbers are based on – preferably other franchisees’ and/or corporate store performance and working on those numbers, what will be your return on investment – those numbers need to be verified as closely as possible to determine how long it will take to get back the money you have invested. You also need to consider what happens if you don’t make your budgeted sales; how long can you sustain a loss? What are consequences from the franchisor’s perspective? Will the term of your franchise agreement be sufficient to get your initial investment back and build some capital as well as the eventual goodwill you will achieve when you decide to sell your franchise business.
5. Assess the franchise offer – a successful franchise requires personal commitment and investment in the business as an owner/operator; you may need to employ staff or may require family members to work in the business or give up a job to work with you, this will require management skills that you may not have considered in the past. Consider whether the franchise business is impacted by any trading cycles and seasonality, for example will the sales throughout the week/month/year vary or are they consistent throughout the year? Will the brand and cultural fit of the franchise match your experience and skills and whether you are passionate about the industry, service and products and will your vision align with the franchisor’s?
6. The location - do you have an exclusive territory; who are your competitors; is being in a mall/shopping centre or near a street shopping precinct the preferred location and will either location affect profitability of the business. Also consider how far you need to travel from home to the franchise location and whether this will affect your commitment to the business.
7. Get independent verification – get financial and accounting advice to review the financial documents given to you by the franchisor, and make sure that the modelling makes sense and the return on investment is achievable. Most importantly, do not sign any documents until you have had them reviewed by a franchise lawyer, who understands the franchising suite of documents and can give you sound advice on your investment. You will be given a suite of documents that you will be expected to review and sign, namely the fact sheet, the franchise agreement, a disclosure document, the franchising code of conduct, whether a lease and landlord disclosure statement or a licence to occupy or a step-in deed and each of these documents will create a contractual obligation on the franchisee when signed, so you need to make sure you get proper and informed advice from a franchise lawyer! Contract Manookian Solicitors, Rostom Manookian, 0416 716 960, rostom@manookiansolicitors.com.
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