Digging deeper into franchising
It’s widely considered that franchises are a safe way to start a business – but you still need a nose for business to make a franchise work.
It has long been known that franchisee failure is a reality. As far back as 1994, figures from a comprehensive study emanating out of Wayne State University, Michigan, of more than 20,500 small businesses indicated that 35 per cent of franchises failed in the first four years.
And recent media coverage about the franchise sector have reported on the outcomes of failed franchises including bankruptcy, loss of the family home, divorce and depression.
While there are many securities offered by franchises – established products and services in the marketplace, high-profile branding, established financial processes, marketing and training – undertaking due diligence is just as important as if you were setting up an independent business.
The Australian Competition and Consumer Commission (ACCC) provides extensive advice on how to gain a realistic understanding of franchising. The advice covers two main themes:
- Educate yourself about franchising and your legal rights and obligations
- Obtain legal, accounting and business advice from experts in franchising about setting up a business.
Do your homework
Before choosing a franchise, you should be aware if the Franchising Code of Conduct Code applies to your situation. Franchisors and franchisees must comply with the Franchising Code of Conduct, which sits in the Competition and Consumer Act 2010.
If the Code applies to your situation, you will need to be aware of your rights and responsibilities under the Code. In addition, you’ll also need to be aware of consumer and company laws.
The ACCC, which administers and enforces the Franchising Code, offers several free online resources to help small business operators and prospective franchisees understand the code, provide them with a realistic understanding of owning a franchise as well as a long list of things to consider including the franchisee manual.
The ACCC underlines the importance of seeking professional legal, accounting and business advice to help you review the pre-contract disclosure document and the franchise agreement as well as consider general business principles.
The pre-contract disclosure document, which the franchisor is legally required to provide to prospective franchisees, contains specific information about the business, such as the franchisor’s financial position as well as costs, and payments or fees the franchisee must make.
The franchise agreement is a legally-binding contract which determines the terms of the relationship between franchisor and franchisee.
The ACCC also suggests you undertake online background checks on the franchise and the franchisor. These may help you with your decision about whether to purchase a franchise or not.
The Australian Securities and Investments Commission (ASIC) website has a number of resources, including:
- checking if the company and/or business name is registered in Australia
- finding information on the company and the people that you are dealing with
- signing up for company alerts in order to monitor the documents a company lodges.
If you’d like to do further research into franchising, there’s a wealth of information available on the Federal Government’s Senate inquiry into the operation and effectiveness of the Franchising Code of Conduct.