Is it really a good idea to invest in a franchise?

Understanding the bank’s criteria and providing the right information helps smooth the path to obtaining the approvals you need. Some franchisors have bank accreditations in place to assist in that process.

The second key area to look at is the quality of the franchisor and the franchise system. Some areas to assess are:

• How long the franchisor has been in business.
• What the franchisor’s strategy and plans for growth are.
• Is it soundly financed? You may need the assistance of an accountant to review audited financial records.
• What qualifications and experience the directors and managers have.
• What innovations the franchisor has introduced.
• How ongoing support and training is provided.
• Experiences that current and former franchisees have had with the franchisor.

Prospective franchisees should be able to obtain sufficient information from the franchisor to be able to make an informed decision about entering into a franchise agreement.

All franchisors need to comply with the Franchise Code of Conduct, which covers the key areas of disclosure, franchisee rights under a franchise agreement and dispute resolution.

It applies to all franchise agreements entered into or extended on or after October 1, 1998 and is enforced by the ACCC, which is responsible for investigating complaints and providing education in the form of guides, articles and presentations.

If after working through those issues you’re still keen to invest in the franchise you’ll be asking them to “Show me the money!”

Franchisors can provide projections of your earnings potential but they can be misleading. Some key questions to ask when reviewing projections are:

• Is the projection based on average incomes?
• Are all franchisees included in the projection, including underperforming ones?
• Are a small number of high performing franchisees inflating the figure?
• If not all franchisees are included what is the geographic spread and impact of any cost and market conditions that vary by location?
• Are any of the franchises company-owned? Company owned sites may have different or discounted costs.
• Are figures based on gross sales that don’t show actual costs or profits?
• When will you break even, receive income and a return on your investment?

Finally at some point in time you’ll sell or exit the franchise, making it important to also understand the conditions for ending the franchisee agreement and what intellectual property or other rights you will own.

Covering all your bases and obtaining an accurate picture of what you’re investing in will assist with making the right decision and reaping the rewards that come with it.

Marc Peskett is a partner in MPR Group, a Melbourne based firm that provides business advisory services as well as tax, outsourced accounting, grants support, financial planning and finance lending services to franchise businesses and fast-growing small to medium enterprises.