A theme in the current Franchising Code of Conduct review that is consistent with previous federal and state inquiries into franchising underlines the importance of franchisees knowing what they are getting into before buying a franchise.
When decisions to buy franchises are made in compressed time frames based on little background knowledge of franchising or the business itself, there is every likelihood expectations will not be met, and business outcomes may be vastly less than satisfactory.
The introduction of the Franchising Code of Conduct in 1998 attempted to address these problems by both requiring franchisors to provide a disclosure document (which must provide approximately 270 items of information, irrespective of system size) at least 14 days prior to signing a franchise agreement, as well as a seven-day cooling off period after signing.
Get daily business news.
The latest stories, funding information, and expert advice. Free to sign up.
But Code or no Code, the decision to buy a franchise is one that is often treated emotionally rather than rationally.
Many of the appeals of self-employment stem from a desire to be one’s own boss, to be in control of one’s own destiny and to enjoy a better lifestyle by having more time with family and to pursue leisure activities.
These appeals are strong drivers for people to go into business for themselves (franchised or otherwise), and are often considered independently of a business’ likely financial performance.
To get past these emotional drivers in order to make balanced business decisions, franchisees need to better educate themselves prior to buying a franchise.
But why would a sector which touts among its principal advantages as the provision of training, support and know-how, consider that franchisees need more training?
The answer is that franchise systems are generally very good at providing the technical, detailed operational training about the type of business to be run by the franchisee, but are not so well equipped to provide general education about franchising and business in general. To some degree, it is too late by this stage anyway as the franchisee has already joined the system and not had the benefit of this knowledge in considering whether or not they are even suited to self-employment.
General franchise and business knowledge will be useful at all times, but particularly when a prospective franchisee is assessing a business opportunity prior to purchase.
In my experience, it takes a prospective franchisee anywhere between three months and three years to commit to the idea of self-employment, and to identify the business in which to invest.
However, many potential franchisees are unaware of the Franchising Code of Conduct before they enter discussions with a franchisor. In other words, most won’t know about the requirement to be given a Disclosure Document until they actually receive one (which leaves room for dishonest operators to capitalise on this ignorance by providing incomplete or no disclosure information at all).
The idea of pre-entry education for franchisees is not new, and in a wider small business context has been touted by many as a way of reducing the failure rates among small business start-ups.
A free pre-entry education program for potential franchisees that is endorsed by the Australian Competition and Consumer Commission (ACCC) and delivered online by the Asia Pacific Centre for Franchising Excellence has had more than 3,600 participants since it commenced on July 1, 2010.
Research into the effectiveness of this education program have indicated that participants take longer to more critically assess business offers, and experience a higher level of satisfaction after investing than people who have not undertaken the pre-entry education program.
By educating potential franchisees before buying a franchise, it can assist them to:
- Better understand the obligations and responsibilities of self-employment through franchising, and in doing so, establish a realistic set of expectations where some candidates may opt-out by realising that running a business is not for them after all;
- Identify the need for adequate working capital and allow for this in their business planning, or alternatively to modify their business search to buy within their means;
- Alert prospective franchisees to the attributes of successful business operators as well as the selection criteria and processes of reputable franchisors. This in turn will help them to discern well-developed franchise systems from those which are only interested in selling franchises rather than establishing mutually beneficial business relationships.
In this way, aspiring franchisees can both increase their chances of long-term business success and ensure a smoother transition into the world of self-employment.
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.
He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.