As the sector regulator, the Australian Competition and Consumer Commission (ACCC) knows better than anyone the things to look out for when assessing a franchise opportunity.
Each year they get calls from people who lose everything after buying a franchise. At the Australian Franchise Expo Online ACCC Small Business and Industry Codes, Director Kristie Piniuta shared three key things to look out for when assessing a franchise.
She covered profit, power in the franchise relationship, and the importance of phone calls to as many current and former franchisees as possible.
When discussing profit she highlighted that royalties, which are an on-going fee paid to the franchisor in addition to the initial franchise fee, are based on turnover, not profit.
“Even if you’re not making enough money to make a profit, or pay yourself the minimum wage, you still need to pay the royalty,” she said.
“This might sound harsh but is a really common part of the franchise agreement.”
She also highlighted the importance of getting business advice and warned that just because a franchise is for sale it doesn’t mean you will make money.
In particular, Kristie warns to be very, very cautious when it comes to income guarantees.
“While they sound great they often have terms and conditions attached, which means unless you do certain things you don’t get the set income,” says Kristie.
“It also means you won’t necessarily get that level of income after the guarantee ends.”
She recommends contacting as many former and current franchisees as possible.
“Ask if it was paid and what the income was after that. If you can’t get in touch with franchisees or they don’t want to speak with you, this is a big warning sign.”
The ACCC offers resources about buying a franchise, including in different languages, at accc.gov.au/buyingafranchise
You can also access the ACCC-funded free pre-entry franchise education program, run by FranchiseED.
The above is only one of several tips and pieces of advice offered by our content experts during their session at the Australian Franchise Expo Online in September 2020. We are excited to announce that a brand new bigger and better expo is coming soon!