Martin: Welcome to the business owners’ podcast where we throw aside taboos and share strategies for growing, protecting and exiting your business. My name is Martin Checketts and I represent Mills Oakley’s Private Advisory team.
So, hello everybody it’s episode 4 of season 6 which is all about franchising and systematising your business. I’m joined for the fourth and final time by our expert panel! We’ve got Corina Vucic –
Corina: Hi Martin!
Martin: Corina is from FC Business Solutions, franchise consultants and operational consultants. We’ve got Ben Fletcher –
Ben: Hi Martin.
Martin: Hi there Ben – Ben is the franchisor of Listen To Your Body, it’s a successful gym network, and we’ve got Greg Thomas –
Greg: Good to be back Martin.
Martin: Hi there Greg – and Greg’s a senior lawyer at Mills Oakley. So, this episode we’re going to be flipping it around. In the first three episodes we really looked at the subject from the perspective of a franchisor – how do you franchise your business, how do you run a successful franchise, how do you protect your brand, and how do you put in place good systems and procedures.
This time however we’re going to look at it from the other side. We’re going to look at it from the perspective of a franchisee, so, if you’re looking at setting up a business you might be thinking about – do I go it alone, or do I go with a franchise network, or you might be advising somebody or funding somebody who is in that position. So I’ll start this one with Greg if I may. Greg, I’m aware that this is a highly regulated area – and that there is all kinds of laws which govern the franchisor/franchisee relationship. If I was a prospective franchisee looking to dip my toe in the water and sign up with a franchise network, what advice would you give me?
Greg: The advice I would give Martin is to get advice. It’s a very important investment you’re going to make and you should be going in with knowledge and just by signing agreements is not the way to go. There are many reasons why you think you don’t need advice, but at the end of the day as I said, you’re making an investment, a substantial investment in many cases, and you need the best possible advice when you’re making that investment.
Martin: How many prospective franchisees just sign up, in your experience?
Greg: A lot. They think that because it’s a well-known brand that it must be okay, that there are other people out there that are operating successfully therefore that’ll be replicated with them – they may think that the franchisor will not change the agreement – what’s the point? Therefore they say okay, well I’ll just sign up. But it’s not so much what’s in the agreement, it’s what’s not in the agreement – and as franchise lawyers will tell you, there are different standards of agreements out there. Whilst there are compliance issues with the Franchising Code, there is still a lot of variation in standard of agreements that are out there.
Martin So Greg, if I’m a prospective franchisee looking at a franchise agreement and the associated disclosure document, what are the key things I should be looking at?
Greg: The first thing you should be looking at is the payments and expenses that you’ll have to pay during the life of the agreement. That’s set out in the disclosure document and also in the franchise agreement. You’ll have typically royalty fees, marketing fees, and you’ll also have all the expenses of fit-out and the lease expense if you’re operating a retail store – they are very important so that you know what you’re getting yourself in for. Other than that, there’s obviously things like actually entering an agreement for a fixed period and it’s usually 10 or 15 years with some extensions on occasion, but you must realise that at the end of that time, that you have no longer got the right to trade under that name and often all that’s left is the equipment that you’ll be selling – so, people often think there’s a goodwill component coming at the end – not necessarily, and there’s cases at the moment in Western Australia that are dealing with that point with people who have owned fast food restaurants for 20 or 30 years thinking that there’s goodwill to be obtained – not necessarily the case. Then you’ve got elements about whether there’s refurbishment of the store, what sort of expenses are going to be involved there, how long the franchise agreement is for, and whether that marries up with your lease. Often the lease may not marry up with the term of the franchise agreement. What happens when the lease is for 7 years but the franchise agreement is for 10? Those sort of things are very crucial issues. What are you able to do after the franchise ends? What are your restraints? You might have been selling a particular product and you may now be restrained, for years, from doing that. You will no longer be able to use the brand – but also you may be restricted in the activities you want to be involved that you’ve been doing for 10 or 15 years. There’s a lot of things to take into account, Martin.
Martin: Wow, aren’t there. And how many people in the euphoria of signing up would gloss over those things.
Greg: They think for the present, not for the future. That’s often the problem.
Martin: Could I ask you about the leases, because as I understand it there’s kind of two models. The franchisor might take the lease and they might sub-lease it to the franchisee, or the franchisee might take the lease direct. Can you talk to us about the up-sides and down-sides of those two approaches?
Greg: Well, in relation to the franchisor taking a lease, it used to be the case that most shopping centres wouldn’t deal with anyone but the franchisor. They wouldn’t go directly with the franchisee. So, typically the franchisor would be the head tenant and they would sub-lease or licence the premises to the franchisee. That gives the franchisor an advantage if something goes wrong because they can just go straight back into the store and run it – the franchisee hasn’t got the same security of tenure as if they were the head tenant. So, if the franchisee was the tenant, they’re obviously going to be more involved in the lease negotiations, they will have more of a say in the occupancy of the premises. Often there will be a right of re-entry if something does go wrong with the franchisee where the franchisor can come back into the store if there’s a termination, but the jury’s out about which one is the best. Often you don’t have a choice if you’re dealing with a shopping centre for example.
Martin: That’s great Greg, thank you very much. I’ll now turn to Corina – I want to go back to this key conundrum around if I’m looking to set up a business, do I join a franchise network or don’t I? What guidance would you give to a prospective franchisee in that regard?
Corina: Absolutely, thanks Martin. There are some people that franchising does not suit. There are some people who jump into a franchise, their entrepreneurial flair, their rogue approach to life and business does not suit a systemised environment, and they end up being the raving lunatics within franchise systems that cause grief. So, sometimes you’ve got to be able to have that conversation with a budding franchisee to identify very quickly with them – will you suit a franchise environment? And if you won’t, then you need to go out on your own and take the risk.
Martin: Wow, let’s turn it back the other way for a minute, yeah – for the franchisor, to have that kind of ‘raving lunatic’ in the network as you say, I mean that would be a disaster for everyone.
Corina: Absolutely, look, those raving lunatics sometimes are wonderful in franchise systems, because they basically hold the franchisor and their executive teams accountable and they push the buttons, they push the boundaries – and quite often they can actually drive some great improvement and some flourishing, budding new concepts – it’s just whether that relationship is actually working for both parties and it’s not causing too much operational grief. You know, we have franchise prospective people that call us into our offices through just basic research and you know, the famous question that we get quite often is well, we’ve looked at two or three franchise systems – which one is the best, Corina? Can you advise us? Or you know, I’ve got a couple who want to invest, can you tell me which one I should be putting my money in? And so quite often for the sector that we work in we give back and there’s 10 standard things that I send them off to think about – and those 10 things start with if you’re looking at a coffee franchise can you see yourself making coffee every day? Can you see yourself wanting to deal with that day to day operation, just because you love a good cup of coffee doesn’t mean you’re going to be able to sit at your coffee outlet and drink coffee from morning until night and expect money to be rolling into the till. We ask them to also go out and if the franchisor in early discussions has encouraged them to go and talk to franchisees, we ask them to not just talk to the franchisees that have been specified which seems to be common practice, we ask them to go and talk to as many franchisees in the system currently, invest a cup of coffee or a cup of tea with them, and just let them chew the fat with you – so, get a feel for the culture, get a feel for the relationships across more than one relationship, get a feel for what’s going on in the business and the average individual will be able to identify who’s not having a good time and who is.
Martin: Wow, that’s great advice and I can see how having that nuts and bolts conversation around what do you think about making coffees all day every day, you’re right – I can just see that people wouldn’t have turned their minds to those aspects. I know the answer to what is the best franchise system. And that’s the LTYB system!
Martin: Welcome, Ben! Tell us! What do your prospective franchisees want? What benefit – I won’t ask you if you’ve got any raving lunatics in the system, but um, what benefits do they see of being a franchisee vs setting up their own gym?
Ben: I think just being part of something is pretty big for us, and people love the internal community – I’ll have to answer that question we don’t have any lunatics in our system, for the record! We have got a very good culture amongst the franchisees, but I think the biggest thing is being part of a community vs going alone, as we know being a small business owner is a very lonely place, even the partners won’t really understand so being part of something, to share successes and share challenges with each other, we have a monthly franchise meeting, so we probably have contact with the franchisees three times a week from head office – we really engage with the franchisees. Being part of that is a very big one for our prospective franchisees, so the reason why they can see – as all of our franchisees have either been members or staff members – so they’re actually in touch with the culture and the brand so, that’s probably the biggest draw card for us.
Martin: One thing that I’ve seen you do really well in your business is around the broader commerciality because I’m generalising here, but I can only imagine a lot of franchisees, and for example in your game they might be gun personal trainers, they’ve never run a business. So for things like, for example, site selection. It just seems to me there’s an awful lot of IP and knowledge in your business about real estate and how to negotiate a lease and all of that kind of stuff because your model is the franchisee would hold the lease, is that correct? So to my mind, to help them with all of those things that would be a foreign world, I could imagine, to many of your prospective franchisees.
Ben: Yeah I mean I think all industries are different, but for our industry I, you know, to go into it I guess with the competitive nature as well, it probably took us, it’s taken us nearly 16 years, 130 employees, a couple of million sessions to actually think we’re going okay in what we’re doing in our systems and all of that and to pass on that knowledge in a one-hour meeting with someone is massive for us – and I sort of … I see some people try to go in for a site they didn’t go for a permit then they’ve shut down after a year, they’ve lost $800,000.00 out of a transaction through a lack of knowledge – you see it a lot, so… I think it’s critical. I’ve even been in interesting conversations with people who have looked at franchises, similar to what Corina was saying before, I even felt they weren’t suited for franchisee material because a great franchisee is someone who absolutely follows the system, that’s as simple as it comes I believe. I didn’t think this person was suitable but what I was willing to do because I didn’t want to see him get in a lot of trouble is actually offer my time and help them with a little bit of the stuff _______________________ and I just didn’t want the people to lose their money, there’s too much at stake with a bad transaction, I’d rather offer the advice for free, you know, obviously on a minor level, but yeah.
Martin: Yeah. A couple of million sessions … so how many push ups would that be?
Ben: Yeah! We’ve seen a lot over the years, it’s a good insight.
Martin: Just on this point around yeah, the best franchisee, yeah, digs the brand and wants to follow the system, I get that. But how do you test that?
Ben: You can test it by the systems we run, how aligned are the systems to our company values, to our company direction? And you can actually see or you actually can test it – we do test it on site – we test it week to week on reporting –
Martin: Sorry Ben, I meant more at the interview stage, so you’ve got a red-hot prospective franchisee, you’ve got a territory ready – and of course they’re saying they love the systems and they want to follow it – I mean, no one says I’m the raving loony who’s going to be militant – so how do you satisfy yourself?
Ben: To be honest … a hunch! Because you’re exactly right, because everyone’s going to interview really well, look, we’re being fortunate I mean part of our strategy is – if we can – try and get to know the person as well as we can before we grant it vs a cold meeting, and it’s just absolute guesswork. We had one a period of time ago we thought was a really good opportunity and we just thought they needed to work 6 months in the system and see how well they followed the existing systems, and we actually made that decision and it was a great decision to do it that way, so, if we can actually see that and even little things like from a testing point of view, we’ll send out the application forms and say “can you just get this back by 5pm on Tuesday the 23rd?” and see if they do it. So, those little things, those little tests and tricks you can sort of do to see how well the policies I mean, even if they’re a member – do they bring their towel, that’s a system!
Ben: Do they bring their drink bottle? That’s a system. Do they turn up on time? That’s a system. Do they follow what the instructor says? We had another one at a studio, a really good enquiry I’m going to say it’s broadly because we’ve had about 20+ in the last year so I don’t think I’m going to get myself into trouble here but, when you’re digging a little deeper to find out what a person is like as a member and the first thing the franchisee said to me “really fit, but just loves to do their own thing” – thanks for that (siren noises). So, I don’t think there’s a proven method to test.
Martin: I do like that kind of ‘try before you buy’, it’s kind of like a probation period in an employment contract – and it’d be really good I think for the franchisee and it probably goes to your question Corina you know, ‘will you be happy making coffee all day everyday’ well maybe try it – try it as an employee for a period and if that goes well, then maybe you can take the next step because Greg, there’s no honeymoon period in the contract – I mean, I know there’s a cooling-off period, but once you’ve consummated a deal, legally that’s it, right?
Greg: You’re right, and often in my practice I see franchisees about 5 or 6 years in, in dispute with a franchisor because they’re saying ‘we’re not getting any value out of our franchisor anymore, we’re paying a royalty fee, we could be doing this ourselves’. I know the brand is there, but it’s a very common thing, I always tell my franchisor clients ‘okay, they’ve bought this up, let’s make sure you’re telling them what value you’re bringing them and make sure you don’t end up in a fight’. It works both ways, but that’s a very common thing – half way through the term, I could be doing this myself, I don’t need the franchisor anymore.
Martin: Yeah, thank you. Corina, in terms of the financial commitment and the financial outlays, just give us a feel for it – out in the market, if you’re a prospective franchisee, what are you likely to be investing?
Corina: No problem Martin, look – the sweet spot these days is about that sort of 300 – 350 investment, so when you look at we have about, well with last week with G________ University we sit at about 1,100 and something franchise systems in Australia. The sweet spot has been that 300 – 350, and that’s really been brought on by obviously you know, our GFC cash liquidity and probably people being a little bit more frugal than what we saw in the past, and of course there’s a heavier competition with 1,100+ systems out there – so that’s the sweet spot. On top of that we also look at franchise systems where there are some of those additional investments and costs so there are training fees – you know, I’ve seen training fees that have been added that are about up to $25,000.00 to 30,000.00 for an incoming franchisee or an outgoing depending on the franchise agreement and its terms – we’re also seeing more and more often these days that franchisors are asking franchisees to also have a period of working capital as a buffer as well, not so much in the early days but we’re starting to see that these days and we’re also seeing on top of that your local area engagement and your local area marketing piece – so there might be a local area contribution that you’re expected to add onto that of you know, 15, 20, 25 thousand dollars and in some cases you’ll find that a franchisor will also match that – and that’ll come out of the marketing fund to kick start lead-generation, to kick start brand exposure in that marketplace.
Martin: And again, those kinds of numbers bring home to me the value of advice and I’m biased of course! These are material amounts of money, I mean, along with buying the family home this is going to be one of the most significant financial transactions of your life – and I think you said it so well, Greg, people kind of think they’re buying an asset – but really they’re buying a revenue stream, and if I was unkind I’d say they’re buying a job.
Greg: An important thing for a franchisor is that if the franchisee is not getting legal advice, it’s kind of a red flag to the franchisor – the franchisor wants business people entering into their system. A business person would get advice on an investment like this. By not getting that advice well, who’s coming into our system? Is that the sort of person we want?
Martin: That’s so well said Greg and I think that’s a really timely note to finish this episode. I’d just like again to thank so much our three panellists for all four sessions I’ve found it very, very interesting and I’ve learned a lot. So, thank you very much Corina, Ben and Greg.
All: Thank you Martin.
Martin: Thank you so much guys and I look forward to catching up at the next season.