Evaluating a franchise

It is important to do your due diligence when considering buying a franchise. Before committing to a franchise opportunity it is a good idea to investigate the:

  • franchise system
  • franchisor
  • territory
  • industry.

Below is a list of questions that you may want to ask as part of your evaluation process.

Does the business suit your lifestyle and finances?

Make sure that you are comfortable with the amount of money you are investing. Also consider whether the business suits your lifestyle and personal circumstances, and if you have the necessary skills and abilities.

Has all the required information been provided?

It is a good idea to compare the disclosure document provided by the franchisor with the requirements set out in the Franchising Code of Conduct to make sure they have disclosed the correct information.

Why choose this particular franchise?

Is franchise’s product or service special or unique in any way? Is it a well known brand with a good reputation? Are the operating procedures easy to follow? Will there be an ongoing demand for the product or service, or is it a fad? Does the franchise offer products or service of a consistent quality? You don’t want your business to be tarnished by the performance of poor operators.

Is the franchise well established?

If the franchise has operated for some time check it has a good record of success. Assess how well the operating systems work, now and to meet future needs.

Is the intellectual property well protected?

How has the franchisor protected trademarks, confidential information and systems?

How does the franchisor manage business territories?

How many territories does the franchisor have? How many are occupied? What type of territory will be granted – exclusive or non-exclusive? Will the franchisor be able to compete with you within your territory or online?

What are the ‘restraint of trade’ clauses?

A franchise agreement will generally include ‘restraint of trade’ clauses preventing you from competing with the franchise itself during the term of the agreement and for a period after the agreement ends. Make sure you understand how this will affect you while running the franchise and after you exit.

What are the ongoing costs payable to the franchisor?

What are the fees and how are they calculated? Check whether it is a flat fee, is based on sales, or a combination of both. Are you required to buy the product and supplies from the franchisor? If so, what is the mark-up? You could also be obliged to contribute to other expenses such as a shop fit-out, marketing and advertising, promotional activities, or computer systems. These additional costs must be included in your business plan and cash flow forecast.

What other costs are required to operate the franchise business?

How much working capital will you need?

How does the cost of buying a franchise compare with starting a similar non-franchised business?

Have you considered the advantages and disadvantages of starting a similar, non-franchised business?

What is the term or duration of the franchise agreement?

An initial five year term, with an option to renew for a further five years, is the most common model in Australia. Check that the franchise agreement will be long enough to make a satisfactory return on your investment.

What is your exit strategy?

The franchisor is not required to renew an agreement after it has expired. The business will revert back to the franchisor and you will not be compensated for any goodwill you have created in the business. You will need to plan for this eventuality.

Have you spoken to other franchisees?

The disclosure document will list all the current franchisees. It is really important to speak to them to check if they are satisfied with the franchisor, any problems they have encountered, how easy it is to communicate with the franchisor and how supportive the franchisor has been, particularly in the event of problems arising. Also speak to franchisees who have left (they can often be contacted through online forums) to discuss their experiences and reasons for leaving.

What about training?

Ask other franchisees about the initial training provided by the franchisor and whether it is adequate. Check where it will take place (it may be in the eastern states and you could have to pay for the training plus travel and accommodation). Also determine if ongoing training is provided.

More information

► Download the Australian Competition and Consumer Commission’s Franchisee Manual
► The Franchise Council of Australia provides further information on evaluating a franchise
► Find out more about buying a franchise