What franchisees must know before buying a franchise

A recurring theme of the state and national franchise inquiries, which have resulted in changes to the Franchising Code of Conduct starting from July 1, is the need for greater education before people buy a franchise.

The Franchise Advisory Centre and many others which made submissions to these inquiries all advocated the need for pre-purchase education for potential franchisees as one way of reducing future potential conflict in franchise relationships.

The premise is simple: if people know more about franchising before they commit to a franchise agreement, they are able to undertake more effective due diligence and have fewer (and possibly unpleasant) surprises later on if they become franchisees.

Equally, someone who learns about franchising may come to the conclusion that it is not for them, and decide on an alternative course of action. This is an equally beneficial outcome for the franchise sector as the potential for a business failure has been averted.

Unfortunately, one of the great challenges in providing education to potential franchisees is that the very beneficiaries of such an initiative are not prepared to pay for it.

The decision to buy a franchise can be just as emotional as the decision to buy a house or a car. The desire to enjoy a better lifestyle and to make a better life for themselves drives many potential franchisees to place greater emphasis on these intangible outcomes of business ownership than the necessary focus on the business model itself.

Given that the purchase of cars and houses will be the next most comparable experience of a major capital acquisition, potential franchisees often gloss over the “detail” aspects of the business in the pursuit of the dream it is expected to deliver.

People buy houses because they shop in a price range (or slightly above it) and can picture themselves living in a particular house, or because after looking at houses for awhile the right house will become self apparent and wrap itself around the potential buyer like a warm blanket.

Likewise with cars, where many consider the vehicles that we drive to be an extension of our personality (and rather expensive fashion accessories which also happen to serve as a method of transport).

With houses and cars, we attempt to shop in a price range, and then buy what makes us feel good, but which in all cases might not actually be the best decision for us.

Buying a franchise involves a similar emotional experience, but often because of a lack of knowledge about HOW to go about buying one.

For many, an awareness of the importance of knowledge about buying a franchise only becomes apparent when something later goes wrong and they are faced with a “I wished I’d known that before I bought this” moment.

These moments can range from trivial annoyances to financial tidal waves that may wipe out the business and the franchisee’s assets with it.

Prior knowledge is essential to better manage the risk involved in any business enterprise, yet many potential franchisees only seek out knowledge AFTER they have already made a decision to buy a particular franchise.

In this regard, many franchise lawyers around the country will have first-hand experience of clients who are determined to buy a franchise, and only get legal advice as an inconvenient formality that they will not allow to change their mind in any way.

For this reason, knowledge obtained after the decision has been made to buy a franchise can be too late to make a difference to the purchase decision.

The best and most effective time for knowledge about franchising to make a meaningful difference to a potential franchisee is before they have decided what franchise to buy.

The problem is, without a specific franchise in mind, potential franchisees don’t feel the need to pay for any kind of franchise education.

This may well have been one of the reasons why the Australian Competition and Consumer Commission (ACCC) have funded the development of a free online pre-entry education program for potential franchisees to be offered through Griffith University’s Asia Pacific Centre for Franchising Excellence.

The free online education went live on July 1, in time to coincide with the introduction of changes to the Franchising Code of Conduct.

The education program can be completed in a week or less, and involves 20 units which each consider a different aspect of franchising split over five modules (one per day).

The information is presented via a combination of online video, audio and text files that allow users to proceed as slowly or as quickly as they like. Transcripts are available for all video and audio files so that these can be read in addition to being heard or watched.

At the end of each module is a short multiple-choice test to help users assess their knowledge before proceeding to the next module.

This education initiative is one which the franchise sector has needed for many years, and hopefully one which franchisors will recommend to all potential franchisees who come their way.

The outcome of this initiative may be better-informed franchise candidates who undertake more thorough due diligence and who ultimately make better business decisions.

This can only be a positive for the Australian franchise sector and especially for potential franchisees.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues.