Seven Things I Wish I knew About Buying A Franchise
Courtesy Sydney Morning Hearld - August 13, 2013
Franchising experts explain how to avoid the pitfalls.
Buying a franchise can seem like an easy way to get into business, but there are pitfalls.
Phil Blain, a franchise consultant at business advisers BDC, says that along with getting advice from an accountant and a lawyer, potential franchisees should ring existing members of the franchise and ask if they're getting all the support they need from the franchisor and if they would still buy into the franchise had they their time over.
Here are seven things franchise owners say they wish they had known before they bought in:
#1 It's hard work
Jane Tepper bought into licensed cafe franchise Billy Baxter's in 1996, thinking it would allow her to work flexible hours while staff ran the business, but soon discovered how demanding a franchise can be.
“I had a young family and I thought maybe I'd work 10 to 3 and wander in and out, but it's not that way at all. You have all the ongoing problems of staffing and people going sick, and you have to be there to oversee things because people want to see the owner,” she says.
#2 You're not your own boss
A lot of people get into franchising because they like the idea of being their own boss, but Tepper, who successfully sold her franchise in 2002 and is now a franchise consultant, says that's a common mistake.
“You are definitely accountable to someone else and they have the right at any time to come in and ask what's going on, 'show us your books, show us how you're running things, show us how you're running your staff',” Tepper says.
“So if you're the type of person who just wants to run your own business and do it your own way, you have to rethink a franchise.”
#3 It costs more than you think
When people weigh up the cost of a franchise, they usually just consider the franchise fee and the cost of a shop fit-out. They often overlook other costs, such as solicitor and accountant costs, says Blain.
And many franchisees underestimate how much working capital they'll need, to buy stock and support themselves while the business gets established. “If you're scratching to the last cent to get in, don't do it,” Blain says.
#4 You're not buying a business
When you buy a franchise you're not buying a business in perpetuity. What you're buying is the right to use the franchise name and system for a set number of years, often a decade.
Blain says franchisees should be prepared for when the agreement expires: they might have to buy the franchise again or pay a renewal fee, or in some cases the franchisor might not let them renew the franchise agreement and the business will be at an end.
#5 Watch out for shopping centres
Along with answering to the franchisor, owners of retail franchises are at the mercy of their shopping centre, which has a lot of power.
Once the franchisee's lease is up, the shopping centre can demand that the franchisee refits the shop, the cost of which can run to hundreds of thousands of dollars. “Those refits can be anything from a touch-up to a complete new shop, at the insistence of the shopping centre and the shopping centre's designer,” says Blain.
Second, the shopping centre can move the franchise to a less favourable position in the centre if it has a better tenant, and while the franchisor might have promised in the agreement to use their “best endeavours” to negotiate with the landlord, there's often little they can do.
“Some franchisees are faced with closing their business as a result of these things,” Blain says.
#6 The territory might not be all yours
Brian Keen bought into a franchise retailer called Bedsheet in 1981. While the investment was ultimately successful and he ended up owning seven stores, he was surprised to discover that the territory he thought he'd bought didn't actually belong to him.
The franchisor opened a new store near his own when Keen was trying to get his business established. “I was panicking. I was really distressed about it,” he says.
While people who buy into franchises think they're buying a “territory”, Keen says sometimes this can be unclear in the franchise agreement and the franchisor can have some discretion over where to open new shops.
#7 Undisclosed commissions
Keen was also surprised to hear that the franchisor was taking undisclosed commissions from a supplier when the members of the franchise purchased stock from them.
Keen, who now works educating franchisees, says such practices aren't uncommon and anyone thinking of buying into a system should check to see whether the franchisor is taking any commissions.
Enter into your new business understanding what you are signing up for and you'll be less likely to run into issues that some franchisees have experienced. Contact our Commercial Law team to discuss your business needs and to book an appointment to have any documents looked over.