Size up a franchise in seven easy steps

Australia is the world’s most franchised nation. It has three times more franchises per head compared with the United States, according to IBISWorld, which describes the $180 billion industry as “booming”.

If you are keen to join the boom by buying a franchise, you’d better be careful. A recent watchdog report found that some franchisors inflate potential income.

Here’s some expert intel on how to spot a legitimate franchise opportunity.

1. Test your enthusiasm

“This is where people go wrong most of the time,” says Brian Keen, who runs the franchising mentorship hub Franchise Simply. Ask yourself whether you have “a deep-felt passion” for the product or service, says Keen – a 40-year business veteran. “If you just think about the money then it may not be enough to sustain your enthusiasm in the longer term.”

Never underestimate the importance of the “personal stuff”, Keen says, adding that would-be franchisees routinely neglect “human issues”.

“They just look at the business – the money – and they don’t really look at themselves from the point-of-view of what their passion and their energy and their soul is and so on.”

2. Meet your potential fellow franchisees

“You must speak to several franchisees even before you meet the franchisor if possible – that’s critically important,” Keen says.

Observe whether the existing franchisees are welcoming and if they work together effectively, he says. The strongest franchise groups are the ones where the franchisees heavily engage in the system, sharing their knowledge and supporting each other, he says.

The franchise disclosure document that your franchisor should provide will list all franchisees past and present – including the ones who “terminated” or sold, making it easy to chase them up. Treat any franchisor who fails to produce the disclosure document promptly with suspicion, Keen says.

3. Think thrift

Ensure you are certain that you can afford a franchise because cost is “absolutely critical”, Keen says. Ask yourself if you can withstand a low-growth six-month slump – as franchisees often must.

“People get in strife,” Keen says. “We’re all greedy, aren’t we? And you go for the one you can’t afford.”

Instead, be conservative. Go for a modest option, he says. “Then you can move up to something bigger later on.” Remember how hard it is to borrow money now.

4. Collar the owner

Gauge the willingness of the franchisor to discuss any queries you have after reading the disclosure document.

Some franchisors “clam up” at this stage and refuse to release more information than the disclosure document strictly requires, says Richard Lysnar, a registered commercial valuer for Propell National Valuers.

5. See if the banks are on board

If one or more of the big banks routinely lends money to potential franchisees needing help getting started, that’s a good sign. It shows the banks have confidence in that franchise, says Lysnar.

6. Check the churn rate

A franchise with a high franchisee turnover rate or continuing disputes with franchisees is suspect. The disclosure document should expose these incidents, according to Lysnar.

7. Beware obsolescence

A franchise operating in a market undergoing fundamental change could be problematic if the franchisor fails to move with the times, says Lysnar.

Take for example a newsagent, where the traditional operational strategies of selling magazines and delivering newspapers are challenged by customers turning to online media.

“Newsagents these days tend to be little more than Lotto outlets. However, that in itself will not sustain a long-term business,” he says.

The story Size up a franchise in seven easy steps first appeared on The Sydney Morning Herald.

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