The strong educational focus of both the Western Australian and South Australian Franchise Inquiry reports released in the last few days underlines the importance of franchisees knowing what they are in for before buying a franchise.

The decision to buy a franchise is one that is often treated emotionally rather than rationally. Many of the appeals of self-employment stem from a desire to be one’s own boss, to be in control of one’s own destiny and to enjoy a better lifestyle by having more time with family, with these non-financial considerations accounting for up to 80% of the decision to become self-employed.

To get past these emotional drivers in order to make balanced business decisions, franchisees need to better educate themselves prior to buying a franchise.

Decisions to buy franchises made in limited timeframes with little background knowledge of franchising or the business itself are fraught with danger and frequently end in disaster. The original introduction of the Franchising Code of Conduct in 1998 attempted to address these problems by both requiring franchisors to provide a disclosure document (which must provide approximately 250 items of information, irrespective of system size) at least 14 days prior to signing a franchise agreement, as well as a seven-day cooling off period after signing.

At the time, these innovations were believed to be adequate, but since then the Code has been amended twice, most recently with further disclosure requirements added as a result of the 2006 Matthews Report.

But Code or no Code, the decision to buy a franchise is one that is often treated emotionally rather than rationally. Many of the appeals of self-employment stem from a desire to be one’s own boss, to be in control of one’s own destiny and to enjoy a better lifestyle by having more time with family and to pursue leisure activities. These appeals are strong drivers for people to go into business for themselves, franchised or otherwise, and is borne out by a 2007 Franchise Advisory Centre study which found that almost 80% of the reasons given for buying a franchise involved non-financial factors such as lifestyle, brand support and to be in charge of one’s own destiny.

To get past these emotional drivers in order to make balanced business decisions, franchisees need to better educate themselves prior to buying a franchise.

A 2007 online poll conducted by the Franchise Advisory Centre posed the question “Should business and franchise education be compulsory before buying a franchise?”. Respondents were primarily franchisor personnel and the result was a unanimous YES.

Both state inquiries and Matthews Reports even fielded recommendations along similar lines – that education should be available for franchisees prior to buying a franchise.

But why would a sector which touts among its principal advantages as the provision of training, support and know-how, consider that franchisees need more training?

The answer is that franchise systems are generally very good at providing the technical, detailed operational training about the type of business to be run by the franchisee, but are not so well equipped to provide general education about franchising and business in general. To some degree, it is too late by this stage anyway as the franchisee has already joined the system and not had the benefit of this knowledge in considering whether or not they are even suited to self-employment.

General franchise and business knowledge will be useful at all times, but particularly when a prospective franchisee is assessing a business opportunity prior to purchase.

In my experience, it takes a prospective franchisee anywhere between three months and three years to commit to the notion of self-employment, and to identify the business in which to invest. However as little as 10% of potential franchisees are actually aware of the Franchising Code of Conduct before they enter discussions with a franchisor. In other words, most won’t know about the requirement to be given a Disclosure Document until they actually receive one (which leaves room for dishonest operators to capitalise on this ignorance by providing incomplete or no disclosure information at all).

The idea of pre-entry education for franchisees is not new, and in a wider small business context has been touted by many as a way of reducing the failure rates among small business start-ups. A 2002 study by noted Australian franchising academic Lorelle Frazer into causes of franchisee failure found that a lack of pre-entry education along with a lack of adequate capital and little or no selection criteria applied by the franchisor were the main contributors to franchisee failure.

By educating potential franchisees before buying a franchise, it may actually assist them to: 

1. Better understand the obligations and responsibilities of self-employment through franchising, and in doing so, establish a realistic set of expectations where some candidates may opt-out by realizing that running a business is not for them after all; 

1. Identify the need for adequate working capital and allow for this in their business planning, or alternatively modify their business search to buy within their means;

1. Alert prospective franchisees to the attributes of successful business operators as well as the selection criteria and processes of reputable franchisors. This in turn will help them to discern well-developed franchise systems from those which are only interested in selling franchises rather than establishing mutually beneficial business relationships. 

In this way, aspiring franchisees can both increase their chances of long-term business success and ensure a smoother transition into the world of self-employment.

Copyright 2008 Jason Gehrke.