If you live in the world of Franchising you would be living under a rock if you were not aware of the federal government’s inquiry into the franchising industry. In mid March the inquiry has released its first findings. I thought I would share my thoughts on one point I believe they got wrong.
I need to preface this article by firstly saying that running a franchise or any business for that matter is not for everyone. Regardless of the support and effort you provide as a Franchisor, some people just can’t make a business work and it is not always the Franchisors fault, however with a better selection process and being prepared to say “no” to people even if they have their heart set on getting started it goes a long way in helping Franchisees success.
Anyone that knows me would have heard me say “I don’t judge a Franchisor by the amount of Franchisees they start but by the amount of people they say no to”. It is too easy to put on a Franchisee because they are about to pay you money. Basing your selection on the short term money is the first fatal mistake and unfair on the prospective franchisee. If you select the wrong franchisee, the money will be spent well before the problems continue.
What concerns me about the initial findings in the Franchise Inquiry is that they seem to want make it more difficult for prospective Franchisees. An example of this is the requirement to provide even more information in the disclosure document. With years of experience I still find the disclosure statement a confusing document. I’m not advocating leaving any important information out of this document, but to simplify it into an easier to understand document. Very few prospective franchisees can clearly understand the disclosure so are therefore required to engage legal representation to explain it to them, often costing a hefty fee and even then they still don’t get a full understanding of it. Many lawyers I know have struggled to easily explain the disclosure so what hope does the average mum and dad have? On many occasions I’m convinced they don’t even look at it. I could count on one hand the amount of prospective Franchisees who have asked me a question about the disclosure, which leads me to believe they rarely read it.
Currently there is a suggestion for prospective Franchisees to consult with a lawyer, accountant or business adviser to independently provide advice. My experience shows that on many occasions prospective Franchisees choose not to do this due to the cost. I don’t think this is a great decision but it happens more often or not. One solution to this is to make this advice mandatory. Another solution, is that I believe that the prospective franchisee should at least provide a cash flow projection for the first year so the Franchisor can better understand the Franchisees expectations. This document can then be used as the measure on whether the Franchisor is providing the support or not. This is the time a Franchisor has the opportunity to have the discussion if they feel that the prospective Franchisees expectations are unreasonable. It is also a chance for the prospective Franchise to evaluate if the franchise is going to give them the return they expect. Way to often prospective Franchisees well over estimate their income and underestimate their costs and if this is not discussed before entering into a Franchise agreement the consequences can be dire. If the Franchisor chooses to accept the prospective Franchisees projections as achievable, then this document forms the measure of success. Imagine that, the Franchisee and the Franchisor on the same page before they start!