Franchising

A franchise warning: Act in haste, repent at leisure

Jason Gehrke /

Potential franchisees and franchisors alike should remember this quote when contemplating a move into franchising, not because franchising itself is bad, but because bad decisions about franchising can be catastrophic.

Take, for example, the person who is made redundant from their job (an increasingly likely occurrence at the moment), and who decides to change their life by transitioning from worker to boss by buying a franchise.

Unfortunately the redundancy package isn’t so large that the person can afford to search for the perfect franchise indefinitely before their cash reserves run dry, so they quickly decide on a franchise based on what they think they will enjoy doing, and move to finalise the arrangement with the franchisor.

Commonly, the undue haste of a potential franchisee – particularly one who is not currently employed – can lead to fundamental due diligence factors being overlooked.

These fundamental factors can include failing to prepare a business plan that demonstrates the viability of the enterprise, and failing to get advice about the franchise agreement and business model.

So in other words, the rush to replace an employed income with a self-employed income causes many potential franchisees to make bad decisions based on a lack of knowledge. This is the “act in haste” stage.

Then what potentially follows is a gradual realisation – especially if the business has not met the buyer’s original (and often unrealistic) expectations – that they’ve made a poor decision and the best option is to exit. Thus enters the “repent at leisure” stage.

The franchisee can then discover to their great surprise that, in poor condition, their business could be worth less than what they paid for it; or that there are no buyers for that particular type of business in their particular location at that particular time; or, generally, that the business will take far longer to sell than it took to buy.

In hindsight, the franchisee may also realise (but struggle to admit) that they should have done more research up front before buying the franchise, so that they could be better prepared for the challenge ahead, or make a different purchasing decision altogether.

Similarly, franchisors should beware of acting in haste, especially those new to franchising.

Not every business that evolves into a franchisor will be successful. There have been many concepts in Australia that have been franchised which were not adequately sustainable, not adequately profitable for either franchisees or the franchisor, or which did not have an adequate leadership team to manage its growth.

Examples include high-profile franchise collapses such as Kleenmaid, Kleins and Angus & Robinson. However, for every high-profile franchise collapse, it is likely that several more very small franchisors also crash and burn, often because they should never have been franchised in the first place.

In these instances, the haste to grow a small business by franchising failed to deliver the results for either the franchisor, or their franchisees, and when a business collapse occurs, the consequences are far-reaching and enduring.

Like the headline says – act in haste, repent at leisure.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

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Jason Gehrke

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for 20 years at franchisee, franchisor and advisor level.

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