I read with interest a recent Sydney Morning Herald article about franchising and the questionable activities of some of Australia’s largest franchising groups.
Some very disgruntled franchisees were represented in the article, which also contained views on the pros and cons of the franchise model.
The story reinforced some of my long-held beliefs about franchising, namely that the model sets up an environment perfect for conflict: a franchise is about doing it the franchisor’s way, not necessarily about doing what makes good, solid business sense.
Our experience with franchises
As business brokers and advisors, we have dealt with many clients involved in franchises over the years by:
- valuing franchise businesses
- selling franchise businesses for clients
- helping budding business owners and investors looking to buy franchises
- working for franchisors to help them identify top-performing franchisees.
Unfortunately we’ve come across a number of ‘sad stories’ similar to those in the Sydney Morning Herald article and therefore, to be frank, we seem to have more success in helping clients who want to purchase franchises, rather than sell franchises.
This is because we can provide much more value to potential purchasers by leveraging our experience with franchisors and our understanding of how they operate.
In the buying stage we can conduct a thorough business evaluation and determine a fair market value range, provide support with due diligence and help negotiate with the franchisor to ensure our client gets the best deal.
Unfortunately – and this is only our experience – when we come across franchisees wanting to sell, it’s often because those franchises are performing very poorly compared to the owners’ expectations when they purchased them.
This makes the sales process very difficult.
Why franchises can be a difficult business model
Ultimately, a successful business owner is one who has flexibility to be self-directed in making business decisions.
As I said earlier, the franchise model is generally about doing it the franchisor’s way, not necessarily about a business owner (franchisee) having the flexibility to do as they see fit.
Of course, one of the oft-spoken positives of franchising is that the business model has solid systems, processes and marketing support that aid in providing consistency in the product and service outcome.
Where objectives, motivations and elements of the franchise model and the franchisee line up, the model can be (and is from our experience) very successful.
Where they don’t line up there can be very significant negative implications, usually for the franchisee. This is because the franchisee:
- carries the lease liability on the premises
- has to pay the monthly franchise fee
- has to meet regular refurbishment costs
- must comply with all the rules and regulations of the franchise.
If the franchisor is not making good business decisions and not keeping up their side of the bargain in terms of marketing expense, systems expense, market development, innovation and so on, the franchisee is stuck.
Franchisees are usually on a three, five or seven-year agreement and are obligated to stick around for the long haul.
How to avoid the pitfalls of franchises
It is very important for someone going into a franchise network to do their due diligence upfront.
I am not saying ‘never buy a franchise’.
I am saying make sure your eyes are well open before you buy, know the reasons you’re buying it and make sure you have independent, robust advice to evaluate the expected returns and confirm there is a good probability you will achieve your business objectives.
4 tips when buying a franchise
1. Objectively evaluate the benefits of the franchise group versus setting up or buying an independent business in the same market
2. Get independent advice on the value of the business you’re buying and do due diligence prior to securing a binding contract
3. Talk extensively to existing franchisees and gauge their perception and views about all aspects of the franchise
4. Work with your independent advisor to determine whether this business model is the right fit for you.
JPAbusiness offers a range of services to assist franchise buyers, including:
- Business finder service
- Franchisor assessment
- Due diligence
- Purchase negotiations
- Shop fit-out and premises leasing options.
If you are thinking about buying a franchise, contact the JPAbusiness team on 02 6360 0360 for a confidential, obligation-free discussion.
James Price has over 30 years' experience in providing strategic, commercial and financial advice to Australian and international business clients. James' blogs provide business advice for aspiring and current small to mid-sized business owners, operators and managers.