FINAL WORD

Potential franchisees need to ask the hard questions if they are to pick out a business that can stand up to scrutiny and lead to success.

Professor Andrew Terry on how to spot a franchise winner.

Hindsight is a beautiful thing - an “exact science” in the words of Guy Bellamy and “always twenty-twenty” according to Billy Wilder.

Foresight is an even more beautiful thing – but of course so much more elusive. Picking winners inevitably requires foresight and this - whether in relation to the 24 Melbourne Cup horses or the 2400 ASX listed companies or even the 1120 franchise brands in Australia - is not an exact science. The commitment to a franchise is of course a much more serious commitment than a flutter on the horses or a dabble on the ASX and it is not my intention to trivialise this by the association.

But no investment is without risk and there are no guarantees of success. The odds are nevertheless in the franchisee’s favour. Australian franchising has a good record of innovative and successful franchising but the overall success of franchising does not guarantee that all systems will be successful or even that within successful systems all franchisees will be. How then does a prospective franchisee move the odds in his or her favour?

An informed decision to pick a franchise winner requires an assessment of a number of factors – the concept itself, the system which implements the concept, the financial equation, the franchisor and the franchisee.

The starting point for the prospective franchisee is the disclosure document that franchisors must provide to prospective franchisees. It is a rich vein of information and facilitates due diligence. It provides comprehensive information as to the structure of the system and the experience of the franchisor. It also provides valuable information about past performance - although prospective franchisees need to remember that past performance is no guarantee of future success.

However the disclosure document as such does not protect the franchisee. The law provides redress for false or misleading or incomplete information - but at the end of the day the disclosure document only provides information. Whether the disclosure document records a prospective winner is a matter for the prospective franchisee.

In relation to the other key factors to be assessed in picking a winner the disclosure document is less helpful. It provides little information as to the viability of the business concept itself. We live today in a world of business disruption, and change is a constant. The viability of the concept in a rapidly changing and evolving marketplace is a key consideration for the franchisee.

Similarly the financial equation. While the disclosure document requires certain financial information to be provided the franchisor is not required to provide the information that to most franchisees is the most influential – the expected financial performance and earnings information.

The disclosure document obviously cannot assist in relation to another key factor in picking a winner – the capacity and willingness and preparedness for the prospective franchisee to trade off independence to work within the franchisor’s system.

Whether or not the franchise is a good fit for the franchisee is of course of interest to the franchisor - but it is ultimately one for the prospective franchisee. It is in this context that the prospective franchisee is in a much stronger position than the gambler or the investor. Once the bet is placed there is absolutely nothing that can be done to influence the outcome of the race. Once the shares are bought there is, in practical terms, little that a small investor can do to influence the outcome.

But a prospective franchisee is much better placed to make a good decision and, because a franchisee is an operator and not simply an investor, to influence the outcome through active participation.

The advice - given so often in this column - is that prospective franchisees must exercise informed due diligence.

Talk to former and current franchisees, family, professional advisors. Get educated as to the realities of franchising. Ask the hard questions. Be prepared to step away from the opportunity that seems too good to be true.