DIY franchising : what are the risks?

Tuesday 21 July 2015

risk of franchising By now you have no doubt immersed yourself in many aspects about franchising to learn and absorb as much information as possible. Many people at this stage find themselves asking the question “Why don’t I give it a go myself?” Could it be as simple as copying another Franchise Agreement and Disclosure Document and you’re off?

Some of the more challenging work we are involved with come from business owners who have previously engaged a bargain basement “copy and paste” franchise consultant or those who have developed the franchise system themselves. Both outcomes have been unsatisfactory, and now they are faced with further costs to fix the mistakes, which can often carry significant legacy issues with them.

The most important point I would like to highlight is that leaving any stone unturned in developing your franchise program not only affects you and the success of the business you have spent long hours developing to this point, but it can severely impact other people. Franchisees may have to put their house on the line in order to get funding for their franchise. If there are fundamental issues in how the franchise has been setup, it could potentially cost many people their business and their house. These stories are sadly too common. This is what makes the methodology behind setting up a franchise so crucial.

We have seen many systems set up through shortcut methods over the years, some of the common recurring themes and issues are:

1) Insufficient financial analysis

Franchising can offer an appealing financial opportunity to all stakeholders if it is set up correctly and measured against appropriate benchmarks. However, there are many elements to take into account and sensitivities that should be considered to determine whether the financial return is sufficient in a range of scenarios. Incorrectly determining a Royalty Fee or, Marketing Levy by 1% or may not seem like much today, but down the track it could cost your business hundreds of thousands of dollars. Conversely, it could be the difference between successful franchisees and failed ones.

2) Copycat financials or legal documents

One of the most common shortcuts we see is people copying another business’ franchise model and replacing a business name in Franchise Agreements with their own. This can carry significant risks, as each franchise business is different and has unique commercial characteristics. A sustainable Royalty Fee for McDonald’s franchisees may not be sustainable for a start-up burger franchise. A territory for Poolwex may not offer the same opportunity for a car wash franchise. There is robust thinking that specialists in the franchise commercial and legal industry put into the strategy and franchise detail for your business. Developing the system yourself not only puts you at huge risk of a costly legal dispute with franchisees, but also means your business will not benefit from years of franchising experience across numerous industries and businesses.

3) Recruitment brochures or documents not compliant with the Franchising Code of Conduct

If there is one thing you will hear and read most in the franchising space, it is that the franchisee recruitment process is where many of the problems occur. An under-performing franchisee will typically point back to something promised in the recruitment process. Franchises that offer income guarantees or forecasts during the franchisee recruitment process are treading a very fine line. It only takes a one or two words from an individual or in your recruitment documentation that could see you spend more time in dispute than on growing a successful franchise business.

4) Risking your IP

When franchisees invest in a franchise, they are typically buying the power of an established brand and the systems that come with a proven model. What if all that was to disappear because someone else registered the trademark? Funnily enough, we see many people looking to franchise their business, without protecting the integral part of the business – the brand and know how. This not only means a registration with Intellectual Property Australia, but also placing your know-how in the correct corporate structure. Without advice in this area, you potentially risk excessive change-over costs or a large tax bill. Worse still, if your know-how is not protected, a franchisee dispute could threaten your entire business.

So before you head down the franchise path alone, consider the implication on franchisees and the risk of ruining all your hard work so far. It is best to seek out specialist advice on your strategy, thinking and what you have built in order to maximise your opportunity and reduce your potential franchise risks. It doesn’t cost money to start a conversation!