Choose carefully: Why buying a franchise could be a doorway to your dreams or the gateway to hell

Thinking about buying a franchise? There’s no shortage of options. So even if garden care, baking or beauty aren’t your bag, one of the more than 1,100 different Australian franchise groups out there might be for you.

Yet, for every story of franchise success and happiness, tales of woe and despair abound with lives and savings left in ruin.

Franchisors behaving badly are in the headlines. A senate committee inquiry found evidence of ongoing systemic abuse across the sector and strongly criticised the behaviour of franchisors such as mega Retail Food Group (parent of 10 franchisor companies including Gloria Jeans, Brumby’s Bakery and Crust Pizza).

The report observes: “The current regulatory environment has manifestly failed to deter systemic poor conduct and exploitative behaviour and has entrenched the power imbalance …”

You can read the full report here.

But all is not rotten. At the other end of the spectrum, there’s a new book out about franchise darling and seeming all-around good guy David Penman of Jim’s Mowing. Among stories about the rise of his juggernaut franchise group is his take on what is necessary for success as a franchise.

Penman says: “Those who succeed have that emotional driver. They’re not after the money, it’s the service that really drives them.”

Yet not everything is clear abuse or runaway success. Plenty of frustrations and issues sit in between when people who founded the business and want to maintain control, rub up against the people who bought in, want to be treated fairly and have room to make their own mark.

Generally speaking, franchises are no different from any other business. The unheroic work of people in the company is the sustenance of success and a brand result people will want to be part of.

What makes franchises different from the stand-alone endeavour is the upfront and ongoing trades inherent in the model.

Put most simply, I give you money up front, and an ongoing percentage of sales, and in return get to shortcut a few key things new businesses often struggle with. I get told how to do things, what to sell, and a name people will probably know with ongoing advertising and promotion.

Franchise growth and profitability depend on getting more franchisees. So, it’s in their self-interest to sell a good story. And with more competition between franchises for people who want to ante up the kind of money required, puffery and hype appear as par for the course.

I love the term puffery. It perfectly captures the way people talk about potential benefits. Take reality and add a bit of hot air. It’s both a marketing and legal term for claims that can’t be objectively verified.

But it doesn’t always get people out from under the expectations they set. In a February ruling, a Brisbane court found franchisor RFG breached Australian Consumer Law by making misleading representations about a Queensland Michel’s Patisserie franchise location.

Expectations are writ from things we are told and the way we are told them. So when over eagerness meets a practised pitch designed to downplay any downside, it’s no surprise people find themselves in a business with little resemblance to what they felt was promised.

I think the responsibility for unmet expectations is shared. Yes, the franchisor needs to present an accurate picture of both possible risk and reward and be accountable for what they promise. And if you’re looking to invest, you need to thoroughly interrogate the opportunity before you sign up.  

To get started and before you even choose a franchise, examine what’s important to you. Do you like being told how to do things or do you prefer to find your own way? What do you want from a business? Understand the trade you will be making that’s inherent in the model.

Once you’ve decided to go for a franchise talk to all the other franchisees in the franchise you’re looking at. How do they feel? Does the franchisor make allowances for local markets in how they operate and advertise? If the business relies on products, how do they handle distribution? Look for any complaints or judgements against them. And as with any new business get a good understanding of the market you’re planning to enter, what sort of competition will you face?

To quote the founder of Jim’s Mowing: “If you’re not willing to spend a few hours to do your homework, then put your money back into the bank.” A franchise can be a doorway to your dreams or the gateway to hell. Choose carefully.

See you next week.

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