Getting into business for the first time involves many steps and a steep learning curve.

One way to remove a few complexities (but add some others!) is to get involved in a franchise.

But before you do, it’s best to understand the essentials of what a franchise is and how it works.

What is a Franchise?

A franchise is where you buy a right to use somebody else’s systems, products and/or services.

The “franchisor” is the name of the person selling you those rights.

The “franchisee” is what you would be called as the purchaser.

Beyond this fundamental principle, franchising can (and does) take many different forms. There are often standard specifics, but the details of each franchise are usually worked out on a case by case basis.

More often than not, a franchisor will have a standard franchise agreement and a package of documents that they make available to a potential franchisee. These set out – generally in a lot of detail – the exact nature of what you would be buying into.

If you Buy into a Franchise, What are you Actually Buying?

This varies from case to case. Generally speaking in a franchise you are looking at the following in exchange for your payments:

1. The right to use intellectual property – trademarks, copyrights, customer records, systems and the like;
2. The right to sell something made by someone else, or the right to provide a service using methods that are designed by someone else;
3. The right to receive customer referrals within your work area from a central telephone number; and
4. Support in various forms – whether technical, business, marketing or otherwise.

The Process for Buying a Franchise

The process for buying a franchise is a bit similar to buying any other business, but is more heavily regulated.

Franchising, including buying and selling, is governed by the Franchising Code. This exists largely to protect franchisees and ensure that they are provided with the necessary information and advice.

The Code requires certain steps to take place to buy a franchise.

You must be provided these documents at a minimum:

1. An information statement;
2. A copy of the Franchising Code;
3. A disclosure document;
4. A key fact sheet;
5. A copy of the franchise agreement;
6. A copy of any relevant lease and lease disclosure statements (if appropriate for your particular circumstances).

Together, these documents are designed to tell you what you are getting yourself in for.

Of course you should read them all carefully. For this reason, you must be given a minimum of 14 days from receiving the documents to review the franchise agreement. You can take longer if needed.

During that time you should get any advice you might need from your lawyers, accountants and other advisors. Get the documents reviewed, the numbers reviewed, and generate a list of questions you might like answers to.

The Benefits of Buying a Franchise

The upside to buying into a franchise is that it reduces some of the risks and complexity of getting into a business.

Depending on the nature of the franchise, you could be buying an established name which is already trusted in the marketplace. This goodwill can offer greater chances of success.

Hopefully there would be a demonstrated track record of profits in other locations, and sufficient support to help you do likewise in your endeavours. Each of these offers some comfort that your efforts will be rewarded.

The Risks of Buying a Franchise

That said, buying a franchise isn’t too different from buying any other business – there are significant risks, and many new franchisees fail.

A franchise has many of the same risks that other businesses have, plus a few more:

1. You may find that the initial stages are very taxing in terms of cash flow if you have not yet developed a good base of customers;
2. Up front and ongoing franchise fees can have an impact on cash flow and profitability;
3. While the franchise may have been successful in other places, it doesn’t mean that it will work in your area;
4. There might be a lot more work to get things up and running than you anticipated.

Common Franchising Traps

Part of the reason the Franchising Code was developed is because many franchisees were going in to a new system with the belief that it was automatically going to succeed.

That’s not the case.

Some traps you need to be prepared for, and deal with, in advance of signing the franchise agreement include:

1. The franchisor going bust – what happens to your system if the franchisor goes into liquidation? What happens to the assets, support, and customers you have generated?
2. Personality risk – in newer systems it can sometimes be that the success you are seeing in the paperwork is primarily the result of the talent and personality of the individuals involved, and not necessarily an indication of the system being proven.
3. Compliance Risk – as a franchisee you have limitations on what you can and cannot do with your business. There are also probably steps, paperwork and payments you need to be aware of. Make sure you are aware of these, don’t skim through the documents, and factor these into your decision making.
4. Flawed systems or products – you need to be as sure as possible that the system or product you are buying into actually does what it promises to do. If the underlying system or product fails, is found to be non-compliant, or simply doesn’t work then the entire business will collapse.
5. Territory – most franchises come with limits on your geographic territory. Understand what those limits are, whether they can be changed, and whether there are risks of another franchisee being allowed to operate in your area.
6. Numbers – like all business buyers, you need to do your due diligence on the numbers you are seeing – get advice, ask questions, and make sure you understand as much as possible about your cash projections.

Buying a Franchise? We can Help

While it does remove some of the complexities of buying a business, buying a franchise shouldn’t be viewed lightly.

As with any business purchase you should get advice from the outset. That way you can make good business decisions based on a sound understanding of the risks and benefits.

Get in touch if you need help.