Franchise Council of Australia board member Jason Gehrkeruns the Franchise Advisory Centre and has experienced franchising as a franchisee and franchisor. He believes some potential franchisees don’t adequately run the numbers before jumping in and buying a franchise.
"If they are provided with financial information from the franchisor (or from a franchisee if they are buying an existing business), they usually pass this to their accountant without looking at it too closely themselves. The accountant then will look at the figures and make a comment like “This looks like it could be alright if the figures are correct” (and then add a further disclaimer).
"At this point, a potential franchisee’s selective hearing and vision may filter out the uncertainty of the COULD and IF in the accountant’s advice, as well as the disclaimer.”
So how can potential franchise buyers improve their chances of success by checking the reliability of the numbers they are looking at? For a start, suggests Gehrke, they could spend time in the business and compare figures such as daily sales levels, transaction numbers, average transaction values with the data provided. They can also count pedestrian movements into and past the store for retail outlets and incoming calls or inquiry rates for mobile service businesses.
"Potential franchisees could assess competitors in the vicinity, talk with suppliers and customers and test each line item of sales and expenses for reality. The trick is not to rush into buying a franchise and to make sure you give yourself enough time to do this critical evaluation of the financial information provided.”
Gehrke recommends the following rule of thumb to help you plan how much time this, and the rest of your due diligence should take: allow one hour of due diligence for every $1000 to be invested in the business.
"Taking more time to assess the profitability of a business up front will help you determine if the business will in fact make a profit, and then to further assess if the profitability will provide a large enough return to justify the franchise investment.
"A further consideration is whether the salary you draw from the business, as well the profits, will be enough to cover your existing living costs and loan repayments. There are no short cuts around this process without a substantial increase in the risk of making a poor and potentially disastrous decision.”