Do the Research on Your Chosen Franchise to Reap the Rewards

Date AddedMarch 28, 2010 02:32:48 PM

AuthorRon Nuttall

Category

Would you prefer the security of being an employee, or the freedom of running your own business? A good franchise can offer the best of both worlds. But before you quit your day job and take the plunge, it's essential you do your homework.

Owning your own franchise gives you the opportunity to become your own boss, yet it also comes with ongoing support from a proven organisation. Unlike an independent business owner, you don't have to become an instant expert on human resources, occupational health and safety (OH&S), marketing and a host of other complex business issues. Instead, you have the backing of support staff at head office, just as you would in a big business.

Combine that with established products, a recognised brand and tested business processes, and you can see why more than 63,000 Australian business owners have decided to buy a franchise. For you, it all adds up to less risk.

But that doesn't make it risk-free. Not every franchise lives up to the ideal and ultimately it's your responsibility to choose wisely. It's not just about finding the right franchise and the right territory, then doing the numbers to make sure those sales projections really do stack up. It's also about making sure that your franchise is the right fit for you, with a vision you'll feel proud to be part of, and the right level of support for your unique blend of skills and experience.

Top five tips

When you're looking at choosing a franchise, there are five key elements you need to look out for in the potential business. They are:

1. A proven brand. While it doesn't have to be a household name, the brand should be well-defined and clearly differentiated from its competitors, with a reputation for superior products and service.

2. Powerful systems. After the products and the name, it's the business systems you're paying for. They should be comprehensive, robust and thoroughly documented.

3. A great location. Location is absolutely crucial. No matter how strong the franchise system, if your territory is unsuitable, your chances of success are greatly reduced.

4. Training. The best franchises will support you with thorough training, both before you open and during the life of your agreement.

Head office support. A good head office can help with everything from OHS and workers compensation, to discounted procurement from bulk suppliers. Long after your initial training is complete, they should be there with ongoing support and group advertising.

One way of finding out if your potential franchise measures up to these five key elements is to get an independent report from a specialist research firm such as DC Strategy Research (www.dcsreport.com.au).

The process

In addition to the five key elements that should already be part of the franchise you're looking at, there are some well-established safeguards you can take before you sign on the dotted line to help reduce your business risk when you buy, provided you're methodical and do your homework.

Here's a step-by-step guide

1. Know where you stand. A great place to start is the Franchising Code of Conduct (http://www.accc.govrau/content/index. phtml/taggranchisingcode/), issued by the Australian Competition and Consumer Commission (ACCC). It sets out a framework for your ongoing collaboration with the franchisor, so you can work together constructively to achieve the best outcome for everyone.

2. Check the disclosure document. Your franchisor is legally required to give you a detailed disclosure document before you buy. The Franchising Code of Conduct sets out what it must contain, including background information on the owners of the franchisor, payments and costs, details of existing franchisees and financial benchmarks.

It's a good idea to consult your lawyer and accountant at this point. Don't forget to do a background check on the franchisor and its owners, including their credit records and any court cases they've been involved

3. Meet other franchisees. Contact other franchisees and ask them about their experiences. If possible, make sure you talk to past franchisees as well as current ones

4. Do the numbers. In consultation with your accountant, go over the financial information for your franchise and the system as a whole. Carefully check the assumptions underlying the financial projections for your territory and then use them to come up with a valuation.
There are several valuation methods to choose from. For franchises, one of the most common is the price earnings multiple method. Start with the existing franchise operation's earnings before interest and tax (EBIT), then multiply that figure by a multiple selected from the range previously used for that brand. For example, you might value a franchise at three times last year's EBIT. Multiples vary significantly between different brands and industries, depending on their markestrength and growth potential, so there are no hard and fast rules about which multiple you should select.

5. Arrange finance. Unless you're lucky
enough to have a wad of cash at the ready, this is a great time to talk to a Commonwealth Bank Franchise Banking Specialist about financing your purchase. They spend every day working with franchises, so they have the expertise you
need to get your new venture up and running.

Rod Nuttall is the National Executive Manager of Commonwealth Bank's Franchising division, a specialist team of business bankers dedicated to providing tailored financial solutions to both franchisees and franchisors around
the country. Applications for finance are subject to the Bank's normal credit approval. Full terms and conditions will
pe included in the Bank's offer of finance. Fees and charges are payable.
To speak with a franchising specialist at the Commonwealth Bank, call Rod Nuttall on 0420 946 013.

THE CHECKLIST

Appoint a lawyer that has extensive experience in franchising.
Check the disclosure document thoroughly with your lawyer.
Check current financial statements, preferably going back three years, including the balance sheets, profit and loss statements, and business tax returns.
Check projected sales and profits, and the method used to calculate them.
Ask your accountant for an independent valuation.
Check current and ongoing fees and determine what you get for them. Do they include fit-out? Training? Equipment?
Consult other franchisees. The disclosure document should include a list.
Think about your exit plan. How will you sell? What does the agreement say? Do you have to sell through the franchisor? Are there transfer fees?
Check the franchisor's financial position in thezdisclosure document.
Meet the key members of the franchisor management team.