The
buyers beware guide to purchasing a franchise
(The little article that could save you big bucks!)
Introduction
You name it, there is probably a franchise opportunity available, food, catering, dining, finance, cleaning, health care, electrical, fitness, retail, and so on. For most people the notion of venturing into a franchise opportunity will be the biggest decision of their lives, both financially and mentally. It certainly was for me, however with all the security that a franchise offers, there are still plenty of mistakes that can be made, that is why I have created this book to help you, the prospective franchisee, make a wise decision that will rewarding, enjoyable and be of a financial reward, not a financial ruin.
Whilst the rewards for many franchisees can be great, there is however no guarantee in any type of business. For individuals, or the ‘average Jo,’ investor, even if entering in to a highly successful franchise, if not extremely cautious, the experience can be mentally and financially crippling. The old ‘buyer beware’ is a phrase one should remember when entering into a franchise, just as it is if you were starting your own business from scratch.
Franchising in Australia and throughout the world is a growing phenomenon. The Franchise Australia 2008 Survey conducted by Griffith University found there was a 14.6 per cent growth rate in franchise systems from 2006 to mid-2008. Further, franchised units represent some 3.7 per cent of all small businesses in Australia and the growth rate of franchise units is 15.4 per cent. (The Australian November 28, 2008). And in a trillion-dollar Australian economy, total sales turnover for the franchising sector was estimated to be $130 billion, while about 413,000 people were employed in franchise businesses. There are over 1200 franchisors in Australia, (http://www.franchisebusiness.com.au). So franchising is certainly a growing industry and is here to stay with significant and life changing opportunities for the weary buyer existing. This book is intended to help your life change for the better, not worse.
People choose to look at franchises for many reasons, they include; owning an own business and being an own boss, working flexible hours, to doing something enjoyable or something they have a knowledge of, as well as of course, financial security. Certainly all of these things are possible if one is diligent in doing their research and choosing the right franchise in the right area.
I was involved in a failed franchise operation for which I invested for myself a relatively large amount of money, for which I am still paying. I was unfortunately young, naïve and too trusting of an overconfident and ruthless franchisor. I urge anyone venturing into a franchise to read the following information and ensure they have all bases covered before making any decisions or signing any franchise agreements. Hopefully then they will not make the same mistakes I did! Good luck and happy hunting!
Take home point
Whilst the rewards for many franchisees can be great, there is however no guarantee for individuals, even if entering in to a highly successful franchise. If not extremely cautious, the experience can be mentally and financially crippling. The old ‘buyer beware’ is a phrase one should remember!
Why buy a franchise?
When you buy a franchise you typically are buying a proven concept, business model and successful business strategy. Statistics show that franchised business concepts show a better chance of succeeding than individuals starting their own business. Independent businesses stand a 70 to 80 percent chance of NOT surviving the first few critical years while franchisees have an 80 percent chance of surviving (Michael M. Coltman, Franchising in Canada: Pros and Cons, Self-Coursel Press). So with increased odds in your favour, franchising can be a much safer option as opposed to ‘going it alone.’ This may help prospective new business owners sleep a little easier at night.
Having the support of a franchisor makes a lot of the ground work a whole lot easier. Franchisors generally know their business, they have a knowledge of what works and what does not, they know through experience how to best sell their product having conducted a range of research into their area of expertise.
Franchises have systems in place to induct new franchisees into their business, including the initial training. Franchisors are obligated to provide training for their franchisees. There is much more to running a business than opening up the doors, only when all the pieces of running a business come together will success come. Franchisors generally cover all aspects of running a business. As a franchisee you should be provided with training about the product(s), marketing strategies, advertising strategies, accounting/book keeping, staff training, development and management and a wide range of other business tools. After the franchisee training you should have all the necessary skills and expertise needed to create a successful business.
Brand awareness is another benefit of purchasing a franchise. For many of the larger franchises, the product is already an established household name, so when your business is launched in your chosen area, the public is already familiar with the product and what it stands for, saving you, the new business owner, much time, money and effort in creating public awareness campaigns. It is said that the public need to see your product three times before remembering it, therefore this base is already covered if entering in to and establishing an existing, well known franchise.
Your franchise will have bulk buying power. Therefore products you purchase for use or sale will be cheaper as part of a franchise group. How often do you see large corporations put the ‘little guy/gal’ out of business through their large buying power? Such buying power can also cover advertising, for example tv advertising can be expensive, but with the collective financial resources of a large franchise group, cost are drastically reduced with the same or larger amount of audience being reached. Furthermore your franchisor will already have conducted research regarding the best type of advertising for your business, therefore you can more cost effectively reach your target market. So stock, product, advertising and marketing wise you can often get a better ‘bang for your buck’ within a franchise group.
Your franchisor will give you help with launching your business. This will be of great benefit in attempting to get your cashflow into the positive earlier, rather than later. Many businesses fail to see a profit within the first twelve months. This can prove problematic for you as a business owner, particularly if you have little capital reserve, you may still have to pay house mortgages, business loans, pay bills, wages and certainly have money to live on. Receiving positive cashflow as soon as possible will not only relieve this pressure, but also allow working capital for you to improve the business and continue to grow.
Most franchisors also provide ongoing business support and strategies, again to help grow and improve the business. It can be like having a personal ‘business coach.’
Being part of a proven franchise group, it may be easier to raise capital needed with lending institutions if you do not have the capital up front to begin with. A successful franchise will be seen as being safer than loaning money to someone ‘going it alone.’ You also may not have to rely on family members as guarantors, or put your own home up as security on any loans.
As a franchisee you join a culture, many successful franchisors create and host social functions where valuable networking and business idea discussions can be had between franchisees. There may also be creative incentives and/or rewards provided by the franchisor for excellence in business achievement and practice. Ie. Franchisee of the year, etc. These can motivate and spur you on, helping you reach your business and financial goals.
Take home point
Statistics show that franchised business concepts show a better chance of succeeding than individuals starting their own business. Independent businesses stand a 70 to 80 percent chance of NOT surviving the first few critical years while franchisees have an 80 percent chance of surviving (Michael M. Coltman, Franchising in Canada: Pros and Cons, Self-Coursel Press).
Disadvantages of buying a franchise
Buying into a franchise group may seem like a secure, safe and generally risk free investment, however like all businesses there are still risks involved. With all the advantages of buying into a franchise group, there are also many disadvantages.
Initially, franchisors will charge the new franchisee, usually regarded as a ‘franchise establishment fee.’ Such fees can be quite substantive for well known and successful franchises. This may already put many ordinary potential business owners out of the equation, as raising the necessary capital may simply be out of their means. However there are many less expensive franchises around, but they obviously are not as well know or have not reached the success of the more well known franchises, so you may well be getting exactly what you pay for in this respect with regards to product knowledge and awareness within the public.
Not only is an initial establishment fee charged, as a franchisee you will continue to pay franchise fees. These are generally paid to the franchisor based on your gross turnover. So for the entire life of the business the franchisor will cut much off of your ‘bottom line.’ This can be problematic, particularly in the early stages, or if the business is struggling, as the franchisor will still charge fees, even if the business is still losing money! As a prospective new business owner you will need to ensure the value of paying ongoing franchise fees is there and continues to be of benefit for your business, ie brand awareness.
When starting up a franchise you are obligated to run the business as per the franchisors stipulation in the ‘franchise agreement.; This can leave little room for you to add your own creative touch, or change facets of the business to suit your own or customers’ needs. This lack of the ability to change according to what is needed can mean a loss of potential revenue and in turn profits, as the success of many businesses is their flexibility and ability to change according to market and social trends. If you do not have a franchisor who is continuing to reflect on the product and the market and make changes accordingly then there are likely to be long term issues.
Franchisors may make bad business decisions which may directly affect the franchisee. As you are bound by a franchise agreement and often have to follow instructions from the franchisor, this may not be in the best interest for your particular franchise, causing you to either lose money, or miss out on potential income.
Your franchise agreement may have stipulations that impact on yourself, even after the business has been sold and you are no longer involved with it, for example you may be unable to run a similar business for a period of time. This is a general practice by franchisors to help protect their ‘intellectual capital.’ However it can mean your livelihood is constrained, even after having sold the business. For example if you sell a lawn mowing round and then need to work to support yourself, you may be unable to take on customers as an independent lawn mowing operator.
When an individual enters into a franchise agreement and if unfortunately a dispute arises, generally the agreement favours the franchisor. There is a process for settling disputes, however legal representation for the ‘little guy/gal’ is often financially out of reach as compared to the financial resources of a large franchise company. In disputes the agreement rarely offers franchisees a leg to stand on.
Take home point
Buying into a franchise group may seem like a secure, safe and generally risk free investment, however like all businesses there are still risks involved. As a franchise is not a risk free investment, individuals can stand to lose a lot, even their life savings if not careful about their chosen investment.
Pitfalls
Looking at the advantages and disadvantages of entering into a franchise business, it appears that the benefits outweigh the negatives, the statistics of likelihood of success also reiterate this. Although many franchises have a tried and proven business model, this is not an automatic guarantee for success. You need to remember, franchising is a way that individuals and companies can expand their businesses into other areas. Therefore a tried and proven business model in one demographic does not necessarily equate to success in another.
There are many eager, innovative self-starters who expect to grow their companies at profound rates by franchising. Whilst such confidence and belief is necessary to achieve success, it can cross over into unbridled confidence and dear I say it arrogance. Such arrogance can be devastating for a potential trusting and naïve franchisee because of a few factors.
Whilst investigating your franchise you need to not only look at other franchises, but more importantly, investigate and compare the following factors with your potential business; population, socio-economic status, average house price, median income, age demographic, the local industry, unemployment rates, pension rates and disposable income. As a prospective franchisee you need to be satisfied that the business you are purchasing is viable for the proposed local area. It is easy for a franchisor to quote gross turnover and profits for their top performing franchises (And believe me they will!) even if the above circumstances are completely different for the area you are intending to setup a franchise in. I would suggest investigating the franchises located in the areas most like the area of your intended franchise.
Franchisors often cannot see ‘the woods for the trees.’ Because they have launched successful franchises, they expect the same result for all. However as stated above, often many local demographics are different, meaning the local community often has entirely different needs based on age, socio-economic status and available disposable income, etc. Franchisors may be experts about their business as you would expect, but they are not experts on the needs of individual towns, suburbs or communities. Make sure that the franchise you are entering in to has been successful in other similar areas and that you are not the ‘guinea pig’ for an over ambitious franchisor. For example if they are a metropolitan company and have not launched in a country location I would be looking in to the franchise a lot further.
These eager franchisors too, in their quest to expand at a profound rate, can be more eager to sell the next franchise rather than support the newly signed franchisee. This means the advantages of purchasing a franchise because of the ongoing support may soon fade. Before entering I would suggest talk to other new franchisees and find out if they feel supported by their franchisor and in fact are getting good value for their ongoing franchise fees.
Franchisors can have franchisees believe that by centrally handling a lot of the business, ie accounting, client payments, etc, that they take a lot of work load away from them, allowing the franchisee more time to focus on growing their individual business. This at first glance may seem great and like a perfectly logical idea, however as the saying goes, if you want something done properly…well you know! Often with this type of setup, as a franchisee you may find yourself having to double check and ensure that the work done through the franchisors office is correct which can in fact take a lot more time and effort and at the least become annoying and frustrating. Again check their business practices and talk to other franchisees in confidence first.
As a franchisee one would expect that the franchisor has a vested interest in the success of the franchise. To some extent this is true, firstly the franchisor has a reputation to uphold greatly needed for the increased expansion of their business. If the franchisor has a poor reputation, then no one in their right mind would enter into a business agreement with them and they will not be able to easily expand their business. Furthermore, the franchisor makes money out of franchise fees charged to its franchisees, therefore the more successful the franchisee, the more money the franchisor makes, pretty simple! The franchisor too, spends a lot of time, money and effort in training the franchisee and launching the business so they obviously need to be remunerated for this.
Having said this, one entering into a franchise should remember this. Franchising is a means for franchisors to expand their business without having to raise their own capital to outlay, therefore most of the financial risks are predominantly placed with the franchisee. Now for some who are investing for themselves, a relatively large sum of money and in some cases much of their life savings, this can be problematic. As franchise establishment fees are charged, a failed business will financially hurt the ‘average Jo’ investor relatively speaking, a whole lot more than the franchisor. Again franchisees may appear to have a vested interest in the success of the business, but at the end of the day it is the franchisees (YOUR) money that is on the line and I sincerely doubt any franchisor would show any integrity and responsibility and reimburse a franchisee for losses involved with a failed franchise for mistakes (Ie. Poor market research, additional expenditures, etc.) that were not the fault of the franchisee.
When purchasing a franchise you need to remember a vital piece of information. Franchisors are in the business of selling too. Their job to expand their business is to sell franchises. They will generally have a trained member of staff or shareholder highly trained in marketing to actively seek and sign up prospective franchisees. To entice prospective franchisees some will ‘wine and dine’ pamper and generally smooze individuals, coming across as their best friends. Now when considering the above point, that is that it is your money on the line not theirs, again the statement ‘buyer beware’ needs to be very much considered.
Franchisors will deliver a sales pitch and provide a range of information about the business including gross turnover and profit predictions, a lot of which they are not legally required to guarantee. For example franchisors are not liable for incorrect income projections, they can make all the verbal and even written assurances that the business will be earning X dollars, but if it does not….well we know who wears it, the franchisee, ie you! Franchisers will, and do, use statements like. “We have the utmost confidence in the success of this franchise” “This franchise will not fail” “You will make X money” (Believe me you will hear them all) But the franchisor in no way is legally liable if the income projections never come to light. Furthermore if the business fails, I would find it hard to find a franchisor who would show integrity and take personal responsibility for their errors in judgment or poor market research, examples of this are endless!
Franchisors are legally required to provide you with the research they have conducted into each franchise. I would be asking for such research and comparing this with successful franchises based in similar areas. Some franchisors conduct extensive, quality research on many of the areas I have listed previously, whilst others simply drive around until they find somewhere that looks good, this can obviously be a problem.
Many franchises cost a lot for the franchisee to set up. One can literally spend hundreds of thousands of dollars in setting up, to then find out that down the track either another franchise, or competing franchise or business sets up across the road. With regards to the franchise, ensure that you have rights over the surrounding areas so that your income is protected. With regards to other businesses, franchisees will often give assurance that they will not compete with your business. To this I say ‘bollocks,’ if there are choices available for the consumer then you will lose business to your competitors regardless if your product is superior or not. Don’t be fooled, you need to investigate the impact of competitors and be absolutely sure there is enough room in the local area for you all to survive. For example if you open a juice bar and a franchisor tells you that the milk shake bar opening up in the same mall will not compete with you, be skeptical.
Many franchises advertise their franchises as having ‘growth potential.’ Now realistic growth potential may be another thing! For many naïve, unwary franchisees, despite a large work ethic and countless hours of effort, they may have simply bought themselves into a job, not a thriving business. For example if you bought a franchise that realistically could only earn around $50000 a year, to me this would be a tragedy. You could earn similar money on a casual basis working in retail without the stress of running our own business, in retail unlike an own business you would have; holiday time, weekend time; long service aggregation and superannuation paid. You have not also paid tens of thousands of dollars for the so called privilege! Furthermore if you wish to exit the business, who is likely to pay a large sum of money only to earn what they could in a supermarket or electronics store? So be careful you are buying a business, not just a job!
Take home point
Instead of thinking that the franchisor has a vested interest and that they would not launch a franchise unless they are absolutely sure, remember at the end of the day it is YOUR money that is stood to be lost, not theirs! Do your homework!
Be careful you are buying a business that has realistic growth potential, not just a job where you work your backside off just to make an average wage!
Things to investigate before buying a franchise
The research you need to conduct before buying a franchise, should be just as much as if you were buying or establishing a stand alone business. Do not rely on the franchisors ‘word’ as this holds little weight with your money.
As you are entering into a specific field, it is still vital you have as much knowledge, skills and expertise in your chosen field area as possible. Even with franchisee training you will still be talking to customers about your product/services and therefore you will be caught out quickly if you have no or poor knowledge. For example if you are involved in a gardening franchise I would recommend you complete some sort of horticulture training so you can quickly and easily answer customer questions. Such skills and knowledge will also be of great benefit marketing wise, for customers who have a bad experience are likely to tell others, resulting in your business obtaining a poor reputation which will mean fewer sales that will quickly hurt your business. Whereas on the other hand if your product knowledge is good and your advice sound, people will tell others and you are likely to inherit more customers/clients. Thus good word of mouth through sound product knowledge and advice will make your business grow better.
What you then need to do once you have established what area you would like to run a business in. You then need to investigate what franchise group is right for you. This will be based on many factors. Firstly price, you need to not only be able to afford the initial outlay, but you will need a certain amount of working capital. Therefore it is essential to obtain professional advice with regards to exactly what you can afford. Remember if it is a new franchise you also need money to live whilst the business is not making money in the early stages.
If you are looking at buying an existing franchise ask yourself this, why is it being sold? Look at the ‘books’ from at least the previous 3 years. If the business is making money, be careful that the person is selling for genuine reasons. Ie, not a large competitor opening up next door. Is the product still viable? ie, a franchised phone card business would be of little value in today’s mobile phone era.
If the business is not making money you need to be even more cautious. The franchisor may verbally talk up the growth potential of the business, however there are many anecdotal stories of a practice called ‘churning.’ This is the practice of franchisees having to sell or vacate the business due to poor financial performance, even bankruptcy. The franchisor then either acquires the business if the franchisee is bankrupt, or acts on behalf if struggling. The business is then put on the market. Franchisors may do this for many reasons. Firstly if they acquire the franchise because the franchisee went bankrupt, they can resell the business, again making further money through the ‘establishment fee.’ Or the franchisor may be responsible through a signed contract for rent/lease payments for the premises, if the business is offloaded to another franchisee, they will no longer be responsible for these payments, instead the new franchisee will have to lose money by making rental payments and attempting to get the business afloat. Or simply arrogance, the franchisor may simply not want to take responsibility for poor or inadequate research with regards to the area they have set up a franchise. For the unsuspecting buyer in situations like this, the realistic chances of success can be minimal. So do your homework, talk to all previous owners, locals, competitors, ask as many questions to as many people as you can, ask yourself why it is not making money? The franchisor may blame a poor franchisee, however there may be more to the story than what they let on. Really if you are paying a large sum of money, maybe your life savings to buy a franchise, then you want to be getting something for it, not just a money pit! If the franchise is worth its weight, then even a monkey should be able to follow their routines and run it, that’s one reason why you would buy a franchise, that is because of the simplicity of operating it, if the franchisor is blaming former franchisee performance then seriously consider walking away.
If you are at the point where you have decided on what type of franchise suits you, before opening or running your own franchise I would advise gaining some experience working in another, this will be of benefit in several ways. I would go so far as to say that it would be beneficial if you were to work your way into a management role in another franchise. By doing so you will know exactly what you are in for, there will be no ‘hidden’ factors and you will gain a very realistic idea of what is required for your business to be successful and ultimately make money. You do not want to enter a business in which you are working your backside off, being stressed and earning no more than an average wage.
Firstly, your franchisor may paint a much more rosy picture of how easy it is to obtain and keep clients/customers than is realistic. Again they may well quote X amount of customers coming through your doors creating X gross income, but by working in a franchise in an area similar to yours you will soon find out if this is true or just a fallacy.
Ask to see the franchisors research, ask what they have done to arrive to these conclusions, ask what basis they have compared the prospective income to. Many franchisees have entered into a franchise believing the franchisors word. Statements they have conducted 2 years research into the area and the franchise cannot fail, etc. The fact is often research was flawed, often franchisors really do not have any understanding of the specific complexities of the local area eg, a high level of pensioners and thus a very low amount of disposable income. Instead they rely on basic general information about the area, ie median house price. What if 50% of the housing is holiday rental? If you were in a business that relied on locals spending money obviously using such a statistic as house price would be misleading. The fact is house prices do not determine disposable income, resulting in on average many locals simply not being able to afford the product. So check all aspects of the research provided by the franchisor and even undertake you own independent research just as you would if starting your own go it alone business.
Franchisors are required to show you a realistic account of your ongoing costs, eg. Rent, insurance, electricity, etc. But by being involved in and even managing another you will find out exactly what costs are involved, for example there may be extra wages/superannuation, security monitoring, water, council rates, etc. that the franchisor may have omitted for your particular franchise. Furthermore, what people are prepared to pay for a service in one particular area may well be different from the area of your proposed franchise. There are many examples of prices between franchises in different areas, differing, based on what they feel customers are prepared to pay in the different areas. These extra factors when operating under tight margins could well be the difference in succeeding or not, particularly if you have borrowed your maximum to raise the initial capital.
Are you ready to do business?
Now if you are ready to do business with a particular franchisor I would recommend doing two things. Firstly there are many obligations that you and the franchisor need to adhere to under the Franchising Code, therefore go to www.accc.gov.au and familiarize yourself with this code. This may answer any questions you may have developed at this stage.
One thing this document points out is that under the code, the franchisor will need to provide you with a disclosure document. This document needs to outline many aspects about the franchisors business, including names and addresses of current and past franchisees and if the franchisor has been involved in any legal disputes with franchisees. If there have been legal issues, I would suggest contacting and talking to such people, you may find out some useful insights about the franchisors business practices which may save you a lot of money and time.
Secondly I would obtain some independent legal and accounting advice. Legal advice will provide you with information with regards to the franchise agreement, make sure you ask questions and understand all aspects of this document. Accounting advice will help you draw up a realistic and achievable business plan. This will not only put a realistic earning potential into perspective,(At this point you may choose to walk away?) as well it will give you some personal business goals to work towards to keep you motivated if you choose to go ahead and purchase a business.
Again it is vital to read and understand all aspects of the code.
It is important not to be rushed into making a decision and sign a franchise agreement. Make sure you have conducted your own through independent research and sought as much independent advice as you can. Franchisors will use clever marketing tools, much like the ones they will train you to use, in selling you a franchise. One such tool is the fact that people ‘buy on emotion, then justify their purchase after.’ Because the decision is often the biggest one you will make, you will desperately want the business to be highly rewarding and profitable. Remember many of us look at a franchise as a life changing experience. Often we are dissatisfied with our current situation whether it be for lack of job satisfaction with what we are doing, boredom, or because of a lack of earning potential. Franchisors know this and will use this as a tool to sell you their product, a franchise. They will almost sell you a ‘dream’ that is a highly profitable business, fantastically rewarding and satisfying, easy to run, no risks involved. Now for the average Jo, new to their own business such opportunities will seem almost too good to be true. Well for some in fact the opportunity is in fact too good to be true. Be careful to make sure that the earning potential is in fact there. If you have already made sure you have worked in other franchises then you will know how easy it will in fact be to make a profit. Finally remember there is no such thing as ‘risk free!’
Whilst taking your time to decide the franchisor may put pressure on you, for example they may say it is important to move straight away before competition moves in, the early bird gets the worm so to speak. To this I would say if the product is superior it will not matter if you move in before or after. Imagine you move in before the competition, lets say a small hardware store, now after 12 months you have a good customer base, things are going nicely. Now lets imagine a large multinational brand moves into town and sets up shop in the city centre because they can afford a larger rent than you, the fact is it will not matter that you are there first, the fact is the multinational will have a huge buying power, therefore may well be cheaper. It will have large amounts of capital so can employ many people to provide very good customer service. How long do you think your customers will remain loyal, now matter how much of a nice person you are? Don’t be fooled, the superior product will eventually win in the end, generally based on price first, as well as convenience, then service. With my franchise I moved in 12 months before a large competitor. The franchisor informed me it was important to move early and that any competitors would not be in the same market as me as we provided superior service, so naive me did. 12 months later a similar, larger, cheaper product moved in that through it’s larger capital was able to provide the one thing equally well that I thought would be better at, customer service, so even my most loyal customers did not stay as they could receive the same service at more convenient times for less money, at the end of the day how could I blame them for not staying loyal.
Franchisors have an obligation here but unfortunately with their unbridled confidence they are all too eager to continue opening franchises rather than make calculated decisions. Even though franchisors should take full responsibility for unsuccessful franchises for after all, they choose to become franchisors and entice people to enter into their product, unfortunately they do not.
One final thing you need to put into place is an ‘exit strategy.’ You may need to leave the business for several reasons, these could include; illness, lack of satisfaction, failure to make a profit, retirement. Now as you will have invested a large sum of money in the establishment of the franchise, you need to be able to maximize your return on exiting.
You may have a thriving business and therefore have no trouble in selling the franchise, hopefully with a large capital gain, which is the ultimate situation you would want to aim for. Remember however that again the franchisor may charge fees upon the sale of the business, often a percentage of the capital growth. Read and understand your franchise agreement with regards to this.
Remembering that 20% of franchises still do not succeed, therefore I would actually work with a ‘worst case scenario’ rule. Before signing any documents, ask yourself what is the worst that could happen? It may be ‘I may not be able to sell the business, or I may have to sell at a loss, so therefore I may have to sell my home to repay a business debt.’ ‘Yes I would have to start again and save another deposit, however I will not have any family members as guarantors so therefore no one else will be at risk.’ ‘I also have equity in my home so some of the debt could be paid from this provided I can sell it.’ I have seen businesses that have failed where family members have been guarantors. In some cases family members have lost their homes to repay the loan, yuk!.
So ask yourself; if things go pear shape, for which there is a chance, what can I afford to lose? And what can I realistically repay over what time frame? If you had the initial capital upfront and could afford to lose, then that is not so bad, but if you have to borrow, I would also suggest not borrowing more than what you can realistically repay within a certain time frame if the business does not perform, ie. 5 years. It could be either selling your home or repay the debt, or choosing to make the repayments to repay the debt, however it may put you back about 5-6 years?
Often to be successful in business you have to take risks, if business people did not take risks they would not be successful, however I would say ‘expect, work and believe for the best, prepare for the worst.’ But you can minimize the risks by doing your homework, asking lots and lots of questions to lots and lots of people, by reading the Franchising Code, and by seeking independent, professional advice.
Take home point
Gain experience in other franchises, by doing so you will know exactly what you are in for, there will be no ‘hidden’ factors and you will gain a very realistic idea of what is required for your business to be successful and ultimately make money. You do not want to enter a business in which you are working your backside off, being stressed and earning no more than an average wage.
Go to www.accc.gov.au and familiarize yourself with this code.
Take your time to decide, ensure you product is superior to competitors.
So there you have it, buying into a franchise is just like buying any business, the financial, job satisfaction and lifestyle rewards can be profound, but like any business there are risks. I hope that you do your research, use this as a guide, seek independent advice and most of all ask lots of questions and don’t be rushed. Hopefully then you will make a well informed and rewarding decision.
Good luck and happy hunting!
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