Get the full facts when buying a franchise

Selling a franchise is easy. People love the idea of owning their own business and purchasing a franchise is the packaged, low-risk, route to this goal.

A good franchise is a win-win situation. The franchisor (parent company) gets to expand its business rapidly and the franchisee (the franchise buyer) gains access to a proven brand with proven systems.

Unfortunately the market contains "pseudo" franchises – businesses that call themselves franchises but are not really franchises.

Unlike Australia, New Zealand has no franchise legislation defining what constitutes a franchise and what must be provided by the franchisor to a franchisee.

A franchisee could end up investing in a business that has no real systems, inadequate training, a poor product or service. They would be taking a bigger risk than starting up their own enterprise from scratch.

As a buyer, how can you avoid a pseudo-franchise? And as a business looking to franchise, how can you create a genuine franchise?

There are several critical factors. But the key one is openness.

A willingness to disclose information – the good, the bad and the ugly – is a solid indication of the soundness of the franchise system and commitment of the franchisor.

At the very least, a disclosure document should be provided to a prospective franchisee. This contains the history and financials of the parent company, details of the franchise system, financial projections for the proposed franchise, and a list of risks that are involved in investing in it.

If a franchisor is reluctant to provide this information it could indicate that they don't have this information, they are scared the information looks bad or even that there is no franchise system.

From the franchisor's point of view, it is just as important to disclose this information so that a franchisee comes on board having made an informed decision and will not suffer any nasty surprises.

Ray Kroc (who franchised McDonald's) writes how he lost many early franchise sales because he was upfront about the position of the parent company and realistic, even conservative, with the projections he provided to prospective buyers.

It did initially cost him some potential franchisees. Many went with competitors who did not disclose information, or provided inflated figures. In the long run Ray had made the right call as he watched his less-than- honest competitors fall by the wayside.

That the parent company (especially in the early stages) does not show profitability is not a concern for either the franchisor or the franchisee if it is a result of the directors sacrificing revenues and profits to invest in the business and build up a solid franchise system.

Of far greater concern to a potential buyer would be if a franchisor refuses to provide the information in the first place. And a franchisor who is cagey about a prospective buyer speaking to existing franchisees and clients should set off the alarm bells.

Again, from the franchisor's perspective, letting prospects get the inside picture is a smart move. If your existing clients and franchisees are happy, you can continue to expand the network. If they are unhappy, then you have a more pressing problem than selling another franchise!

Remember this principle when looking to buy a franchise – if a franchisor has nothing to hide, they won't.