The following is an excerpt from the Feature article of the AFR Smart Investor Magazine which is available on subscription from the Smart Investor Website www.afrsmartinvestor.com.au all copyright belongs to the Australian Financial Review and the Smart Investor Magazine.
Do you dream of owning a franchise but
don't know which
best prospects? Jackie Pearson
spent three months examining all available systems to ascertain the top eight.
Investing in a franchise is not an easy road to riches. For a start, there are 960 franchised brands to choose from in Australia. Some
have proven track records and worldwide success. They're usually the ones that require a big initial investment and are extremely picky about who they'll accept as a franchisee.
Other franchisers are small business people themselves and have lesser-known brands. They require smaller outlays to start with but
the risks are much higher. Some may well turn into tomorrow's big brands but others will never get off the ground. They could be bought out by other organisations or the brand simply wilIl not work.
According to Franchise Council of Australia chief executive Richard Evans, one in five franchisees will not make it.
"It's more successful than marriage,"
Evans says. "And the thing about it is that both are relationship driven. To be successful in a marriage or a franchise takes good communication" and a commitment to developing that relationship."
Australian Competition and Consumer Commission small business commissioner John Martin says Quiznos is a recent example of what can go wrong. "The problem wasa simple one and it was surprising because Quiznos was a copycat of another food brand that had set up in America as a franchise system and was doing pretty well," Martin says
"The individuals involved initially started two corporate retail outlets in Melbourne and then made verbal promises to potential franchisees about the investment potential if they decided to get in early."
Over 100 individuals paid the initial franchise fee of $25,000 and then committed [to fitting out] their shop, which pushed it up to $100,000. Some of the representations about what you could expect make, some made orally at presentations, were not based on facts. By the time the ACCC got involved, most of the stores had closed and the business had gone into liquidation," he says.
The promoters initially offered undertakings enforceable in court. but during the negotiating process, it was discovered that they couldn't meet franchisees' claims for loss and damages. The franchisor, the ACCC and an independent third party negotiated a settlement and franchisees were refunded their initial fee.
Martin and Evans agree that the best way to minimise investment failure is to carry out substantial due diligence before investing. And that's where AFR Smart Investor can help. For the second rear running, we've examined more than 600 franchisors, looked more closely at the offerings of a final field of 50 and come up with a shortlist of eight that we think make worthy investments.
And the winners are...
We've divided the winners into four caregories, depending on how much capital is needed to buy in.The scores indicate how each
franchisor performed in our assessment of the number of franchises available, company history, availability of trademarks, standards of training and support for franchisees, longevity of franchise agreements and exclusivity of business or marketing territories. See the attached table below for more information on Mr Carports.
To come up with our recommendations, we had to make the tricky journey through franchise land, just like you would in order to conduct proper due diligence before parting with your money. Here's what we learned that might help you along your journey.
Dodge the dodgies.
According to the ACCC's Martin, you're more likely to come across rogue operators at the bottom entry level, where you need between $10,000 and $50,000 to invest. Fortunately, we didn't detect any totally exploitative or rogue operators, but Martin says they do pop up from time to time.
"Usually, we get a bunch of complaints or inquiries about a system that's not a genuine franchise," Martin says. "They make claims
that are just not sustainable about what the business will do. For instance, they say you will earn $100,000 per year guaranteed or they provide no disclosure document. They don't have any substance behind them."
Martin says the ACCC tries to get in before people have parted with their money. It monitors advertisements and conducts outreach programs from its regional offices.
It is a bit sad that people are still their own worst enemies and don't check out the validity of franchising systems," he says.
Are big brands best?
Most of our winning franchisors this year are well known, but high-profile brands are not always the best franchisors. Brian Rohan isfounder and managing director of one of the lesser-known brands, Mr Carports. He and a partner started the franchise in the 1990s. The company sells and installs verandas, pergolas and decks, as well as carports.
"We did everything properly back in those early days and the business just grew and grew until we had to either employ more people or find another solution. We decided the best solution was to franchise," Rohan says.
Now he is about to export the Mr Carports brand to the United States.
"We're already opening our first branch in California. We also want another 10 branches in Sydney and four or five in Brisbane, and we expect to open in Perth when we find the right person."
THE Si TEST
Step 1: We canvassed more than 600 of the franchised brands available in Australia. We then surveyed those franchisors who were members of the Franchise Council of Australia, were Australian based and had franchising opportunities available in at
least three states.
Step 2: Respondents were scored based on:
• The number of franchise units they have available.
• The number of years they have been successfully operating as a franchisor.
• If the business involves the sale of a product, then that product had to be trademarked.
• No requirement for non-refundable payments apart from official franchise fee.
• No requirement to pay for supply of goods above wholesale or significantly discounted prices.
• On going royalties, marketing and training fees.
• Terms of franchise deal, plus renewal options.
• Initial and ongoing training and support provided by the franchisor.
• Exclusivity of business and / or marketing territories.
Step 3: Based on data the franchisors provided, we estimated ongoing royalties, training and marketing costs on a weekly basis, as a percentage of turnover. The two top-scoring franchisors from each initial capital investment category (less than $50,000; $50,000
to $149,999; $15O,OOO to $299,999; $300,000-plus) are included in our winnerstable above.