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The harsh franchise reality check

Monday, 27 August 2012 | By Alexandra Cain

feature-franchising-thumbBudding entrepreneurs with the perception that running a franchise is easier than running your own business could be in for an unwelcome shock, judging by recent developments.

 

Adelaide couple Ross and Sue Pollard became enmeshed in a legal fight with café chain Billy Baxter’s for $1.2 million due to what they claimed to be false promises over profit levels. The parent company for Billy Baxter’s has since collapsed.

 

While not all franchises collapse, the motivations that many people have for going into a franchise business may not always match reality. This was highlighted in a recent poll that found many were attracted to franchise by the promise of flexibility and independence in their work.

 

This prompted a warning from Franchise Relationships Institute founder Greg Nathan that not all franchises can offer franchisees the level of freedom and autonomy they want.

 

So, is owning a franchise really all it’s cracked up to be?

 

Before you invest in a franchise it’s essential to do your homework to make sure you understand what you’re getting into.

 

StartupSmart spoke to franchisees, franchisors and franchise experts to get the lowdown on how to make sure your expectations match reality when getting into a franchise.

 

Getting up to speed

 

Rebecca Parry and her fiancé Luke Joseph have just successfully sold two HydroDog dog grooming franchises in Victoria.

 

She was fortunate because before she bought into the system she had had first-hand experience of the business, having watched her partner operate his franchise for four years before deciding to invest in her own enterprise.

 

“We would not have bought the second business if we didn’t think we could make money out of it,” she says.

 

“But one of the main things for me was the flat fee structure with HydroDog. A lot of franchises take a percentage of sales, so the more you earn the more you give away, but that’s not the case with HydroDog.”

 

“I’d say to other potential franchisees, make sure you understand exactly what you will pay before you make a commitment.”

 

“Also make sure you know how much marketing the franchise will do and that they are keeping up with new technologies like social media.”

 

“Get a handle on the success rate of other franchisees and the training they will give you,” she adds.

 

Parry says it’s also important to be wary of franchises that offer the opportunity to make a lot of money without a lot of work.

 

“Any business owner knows the more you put in, the more you get out,” she says.

 

“You can work at your own pace, but you won’t make much money.”

 

When disaster strikes

 

A key consideration for any potential franchisee is the approach the franchisor takes when something goes wrong.

 

For instance, one of Parry’s clients claimed a dog was injured while in her care.

 

Parry believes the dog in question already had the injury when she groomed it, but she settled the vet bill anyway.

 

“The client called head office, which contacted me to make sure I was on top of it,” she says.

 

“Head office is always prepared to look at both sides of the story and is genuinely supportive and committed to a unified front; they’ve got your back if you need it.”

 

Jeff Kittelty, this year’s Builder of the Year with house building franchise Hotondo Homes, advises budding franchisees to ask plenty of questions and ring other franchisees that are already up and running before making any commitments.

 

“When you buy anything, you’re only going to be told the good side and there are always challenges in business,” he says.

 

“The franchisor is there to help you but you also have to help yourself. If you’re not prepared to change, a franchise is probably not for you.”

For instance, says Kittelty, although he had previously worked as a builder, during the induction process he had to learn how to change the set up and structure of his business.

 

He says: “Being in a franchise, you always have to follow through. Our business coach will give us guidance on how to grow our business, but for that to happen we have to want to develop it.”

 

“Our coach asked us what we wanted from her and I told her that if we needed shaking up for any reason, she had permission to do that.”

 

Being realistic

 

Kittelty says it’s important to acknowledge trends and business confidence change and franchisees have to be prepared to respond to this.

 

Michael Renwick, Kittelty’s franchisor, says he’s very conscious of hosing down any unrealistic expectations.

 

“Some people think we’re a buying group for discounted building materials. Yes, we can buy things cheaper, but that’s not what the franchisee needs to concentrate on; they need to focus on selling more houses to be successful.

 

“It’s the same with marketing – you run the business, we do the marketing,” Renwick says.

 

Martin Rose, HydroDog’s franchisor, says he makes a series of careful assessments to determine if a potential franchisee is right for the business.

 

He says: “Then we put them on the road with a franchisee to have an experience day and after that give them a six-page survey that includes questions like ‘how many other franchisees have you contacted?’ and ‘what did they say?’ to help manage their expectations.”

 

“If they haven’t spoken to other franchisees, that tells us to be very cautious. We will not proceed until they have done their homework.”

 

It's all in the paperwork

 

Indeed, Phil Blain, franchise expert and the co-author of The Franchisee’s Guide, says the bible of every potential franchisee should be the disclosure document.

 

‘Thanks to recent legislative changes franchisees are now able to access critical details in the disclosure document like full details of existing franchisees and also people who have left the system.”

 

“Contacting these people is a great place to start. You also need to draw up questions like ‘are you making the money you thought you would?’, ‘are you getting the support you thought you would’ and ‘if you had your time again would you still get into the franchise?’” says Blain.

 

“Make sure you ask other franchisees the same questions so you get consistency in responses. Of course, not everyone is happy 100% of the time, but if seven or eight people out of ten are happy, it’s probably a good franchise,” he says.

 

Grant Cairns, the Commonwealth Bank’s general manager, industry and banking specialists, says it’s important to understand the difference between a franchise and running your own business before investing.

 

“A franchise is often a useful framework for someone who has never owned their own business because it provides structure and support.”

 

“And a benefit of working in a franchise is that the franchisor understands the regulatory environment and is best placed to provide support on new regulations and rules around workplace relations and occupational health and safety,” says Cairns.

 

“You do need to work within the system, but lots of franchises give the franchisee the opportunity to be creative with marketing and structurally. They are trying to set them up for success.”

 

Five essential tips for prospective franchisees:

  • Make sure you understand exactly what you will pay before you make a commitment.
  • Be wary of franchises that offer the opportunity to make a lot of money without a lot of work.
  • Ask plenty of questions and ring other franchisees that are already up and running before making any commitments.
  • Stay abreast of changing trends and business conditions in the area or industry you might be getting into.
  • Critically assess details in the disclosure document such as existing franchisees and also people who have left the system.
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