HOW TO AVOID A FRANCHISE FAIL

Take steps to know the business you sign up to.

The ACCC points to precautionary steps you can take as a potential franchisee.

For many people, the allure of franchising is tempting when compared to the prospect, or reality, of a 9-to-5 job. You might just be one of those people - spending your commute to work thinking about how you’d rather be strolling down the street to a (wildly successful) franchise that you can call your own.

You may look at one of your favourite local franchises and think “What a life – be my own boss, set my own hours. This place is always busy – I’d make a fortune wouldn’t I?”

At the ACCC, we see many reports from people for whom the franchise dream has soured.

While franchising can be a more appealing way to operate a business by benefiting from the experience and name recognition of an established franchise system, it’s important to take the emotion out of what is, essentially, a business decision. Purchasing a franchise is not a guarantee of success and it’s possible that you or your franchisor could fail during the term of your agreement.

Franchisor failure could put you in a difficult position. For example, you may:

be unable to obtain stock lose your right to use the brand have to continue paying suppliers, landlords, employees and banks even if you can no longer operate your franchise.

There are some key things you should think about before you jump headfirst in to the world of franchising.

DO YOUR DUE DILIGENCE

Before you commit to a franchise opportunity, make sure you understand your rights and obligations under the Franchising Code.

The Franchising Code is mandatory across Australia and regulates the conduct of franchising participants towards one another. It applies to all franchise agreements, including renewals, transfers or variations.

Franchisors are required to give you certain documents before you enter into a franchise agreement or pay non-refundable money. One of the key documents you should receive is the franchisor’s current disclosure document.

The disclosure document will contain important information about the franchisor and the franchise system, including operating costs and fees. Its purpose is to help you to make an informed decision about the business opportunity. When reviewing the disclosure document you should:

• check the franchisor’s financial

details and confirm that it is solvent

• consider the business experience of the people running the franchise system

• check whether the franchisor, any of its associates (or a director of the franchisor or associate of the franchisor) has been bankrupt or insolvent in the last 10 years

• review the franchisor’s supply arrangements, bearing in mind that restrictions on who you can source goods or services from may affect your bottom line.

The disclosure document will also contain contact details of current and former franchisees. You should speak to as many current and former franchisees as you can to understand their relationship with the franchisor. Consider asking meaningful questions, even if they’re difficult, such as:

• are/were they making the amount of money they expected?

• how does/did the reality of the franchise match up against their expectations e.g. work hours etc.?

• are/were they satisfied with the level of support provided by the franchisor?

• if they knew then what they know now, would they have initially purchased the franchise?

• if they exited the franchise system, why did they leave?

Asking these questions from existing or past franchisees will provide you with information that may not be readily available in the documents provided to you by the franchisor.

You should carefully review all of the information provided to you to make sure you’re happy with the way the franchise system is functioning. It’s very important that you also seek independent legal, accounting and business advice from professionals with expertise in franchising.

KNOW THE FRANCHISE BUSINESS

Although the Franchising Code requires franchisors to provide specific documents to you, it’s still important that you do your own research and investigate the franchise’s likely success, including its short-term and long-term viability.

It’s a good idea to pay particular attention to the franchise’s position in the market. You need to think about the brand recognition and reputation of the franchise, the sustainability of the product or service (including likely consumer demand), as well as who your competitors are or could be, and their proximity to your prospective business territory.

If your franchisor allocates you a territory, it may not be exclusive. This means that your franchisor or another franchisee could set up shop in the same

territory and reduce the number of customers that walk through your door. Information about whether the franchisor or other franchisees can operate in your territory should be available in the franchisor’s disclosure document.

You should also consider whether the proposed location or territory is suitable for the type of franchise you intend to operate. Look at the demographics and spending habits of consumers within the area. It’s also important to think about whether you would buy the products or services in the projected setting. Ask your friends and family the same question. If you wouldn’t buy the product you’re selling, how can you convince someone else to buy it?

GET ANY EARNINGS CLAIMS IN WRITING

Franchisors are not required to provide you with earnings information but some choose to do so. Earnings information could take the form of historical data from other franchisees or projections about how much you could expect to earn.

If the franchisor makes any claims about earnings you should ask about: • the extent of enquiries and research undertaken

• the period it has based the claim on

• whether it has accounted for things

such as interest, tax, salaries etc.

You should ask the franchisor to confirm this in writing.

KNOW YOUR COOLING-OFF RIGHTS

If you decide to go ahead and enter into a new franchise agreement, you can still choose to terminate within seven days of:

• entering into the agreement (or an agreement to enter into the agreement), or

• making any payment under the

agreement.

Exercising these cooling-off rights will entitle you to a refund of all your payments (less any reasonable expenses incurred by the franchisor), and the refund must be provided within 14 days.

START-UP CHECKLIST

Here are some of the key steps you should take before committing to a franchise opportunity: 1. Ask yourself - is this an emotional or pragmatic decision?

2. Assess your skills, strengths and weaknesses.

3. Get professional advice from an accountant, lawyer and business expert. 4. Make sure you received the correct documents from the franchisor to help you make an informed decision.

5. Speak to current and former franchisees.

6. Do your own research.

7. If the deal is not acceptable, try to negotiate a better offer or look for a better deal.

The ACCC has a range of education resources dedicated to educating business about its responsibilities under the Competition and Consumer Act. These are available at accc.gov.au, along with specialist franchise training at accc.gov.au/ ccaeducation.

Dr Michael Schaper is the ACCC Deputy Chair. His special focus is on small business, franchising, industry associations and business liaison with the national competition and consumer protection regulator.