Thorough due diligence will help you find the warning signs in a franchise system.

Research by Griffith University in 2009 found that 49 percent of franchisees relied heavily on their gut feeling when deciding to go into franchising. This type of decision-making can make a potential franchisee an easy target for unscrupulous operators.


If you’re thinking of becoming a franchisee, then doing thorough research about the franchise you are considering buying will help you make an informed decision. Doing your homework will minimise the chances of you making a poor investment.

Following the tips below will help you identify warning signs before making that all important decision to buy a franchise.

Do a pre-entry course

Before you even begin looking at the different franchised businesses that are on offer, you should get a better understanding of how franchising works by completing a pre-entry education course.

Griffith University offers a free online education program for prospective franchisees. The program, funded by the Australian Competition and Consumer Commission (ACCC), is designed to educate potential franchisees about their rights under the Franchising Code of Conduct (the Code) and a range of other issues such as royalties, marketing funds and resolving disputes. For more information, visit www.franchise.edu.au/pre-entry-franchise-education.

Get advice

Your franchise agreement is a contract between you and your franchisor. Once you sign the agreement, you will be legally bound to its terms and conditions so it is important that you read the agreement carefully and ensure you understand the legal effect of what you are agreeing to.

The Code requires you to sign a written statement stating that you have received, read and had a reasonable opportunity to understand the Code and the disclosure document (which the franchisor must provide to you). It is essential that you read these documents. Don’t just sign the statement because you ‘don’t have time’ to read them.



As part of the franchise purchase process you will also need to sign a statement that you have sought independent legal, business and accounting advice, or that you have been told that you should seek such advice and have decided not to. It is important that you do seek this advice from experienced practitioners so that you understand your contractual and financial obligations.

A lawyer should help you to identify warning signs in the franchise agreement, including terms that unfairly favour the franchisor – such as the right to terminate the agreement even if you haven’t breached it.

An accountant should help you work out whether the business is financially viable. For example, will you be able to recoup your investment within the five or 10 year term of the agreement (in case it’s not renewed)?

Often prospective franchisees choose not to seek advice as they think it’s too costly. But to put the cost of advice in context, weigh it against the fee which you are going to pay to enter the agreement. In some cases this fee can be half a million dollars. The value of obtaining advice – especially if it prevents you from entering into a bad agreement – is immeasurable.

Speak to existing franchisees

To get an insight into how the franchise system works and the relationship that the franchisees have with their franchisor it is wise to speak to existing franchisees within the network.

The disclosure document must include a list of current franchisees and their contact details and you should try to speak to as many franchisees as possible. You should also take this opportunity to verify any representations the franchisor has made to you to date.

If you receive negative feedback from existing franchisees, you must ask yourself: would I be happy to be in that position?

Speak to previous franchisees

The disclosure document must also include contact details of some former franchisees and it is crucial to speak to these previous franchisees and find out why they left. If the store or territory you’re buying is not a new one, make sure you talk to the previous owner of that territory or outlet about the business and their relationship with the franchisor.

You should ask previous franchisees questions similar to those you asked the existing franchisees. When combined with the information you receive from existing franchisees, this should give you a clear picture of how the franchise system and franchisor operate.

Look out for scams!

An important thing to avoid, and potentially the most financially devastating, is an outright scam. Franchise scams usually promise a risk-free investment with immediate high returns.

Warning signs of scam franchise opportunities include:

• claims you can make large amounts of money quickly and with little effort—i.e. ‘get rich quick’ schemes
• the franchisor is reluctant to give you the contact details of other franchisees, or only wants you to speak to certain franchisees
• the franchisor is reluctant to provide any written information, and is unwilling to confirm verbal statements in writing
• a requirement that payment be made up front before any information is released
• inconsistent financial information about the business’s profitability.

It is strongly recommended that you seriously consider turning away from a particular business opportunity if you see any of these warning signs. If you decide to ignore them and buy the franchise, it may later amount to a bad business decision for which there is no remedy. Remember, if a business opportunity looks too good to be true, it probably is.

In reality, only a minority of business opportunities available in the marketplace are scams. Provided you do your research beforehand you should not be caught by a scam.




Dr Michael Schaper is a deputy chairman of the ACCC.

The ACCC is responsible for promoting compliance with the Franchising Code and the Competition and Consumer Act. The ACCC has several franchising publications containing useful information for prospective franchisees, including a Franchisee Manual and a DVD about the Franchising Code. These are available online at www.accc.gov.au/franchising or by calling the ACCC’s Small Business Helpline on 1300 302 021.