Franchising is big business, worth anywhere from $80 billion to $130 billion per year, depending who you ask. If you’re looking to buy a franchise or thinking about franchising your business model, what do you need to know?

The panel

• Janine Allis, Founder and MD of franchisor Boost Juice
• Damian Arena, MD of franchisor LP GAS 1
• Richard Breden, MD of human resources software maker PeopleInsite
• James Corne, MD of franchising consultancy TheFranchise Institute
• Louis White, Moderator

How do you evaluate who is going to be a good franchisee and who is not?

Janine Allis: The thing is you don’t know. Some people interview really well. I actually said no to one guy twice. He came back and is probably one of our best franchisees now. Other people you get through the network and you go ‘Oh, how did he get through?’ Other times they’re the best people in the world but there are problems. For example when women franchisees have children, their sales go down 20% because they don’t think about replacing themselves in the business, like you would normally in a job.

James Corne: I think one of the things that we try to teach our prospective franchisors is to actually make this a trophy. People have to work at this. They have to work through the difficult times and get to the point where they are so excited and motivated to do it and they run the business like their own.

Janine: If they can’t follow a system through the recruitment process, how can they follow instructions?

Damian Arena: When we first started out we wanted to be everyone’s friend, we wanted to help them out.

James: The problem is how can you select one if you are running a business?

Damian: That’s right. That is part of the problem of the franchisee systems as well, the first year you go through and you’ve created this monster, this huge headache and you are trying to be everyone’s friend. Then we flipped it and said, well look, you signed the franchise agreement that says you can’t scratch your head on a Wednesday, why are you scratching on a Wednesday? So a bit of tough love is needed.

James: I think at the end of the day people are going to franchising to follow a system. If you are a pure entrepreneur, franchise is probably not going to be right for you.

Janine: People often get into franchising because they want to run a business and the percentage of successful businesses in franchising are higher than other businesses. However, it can still fail. There is no guarantee or no certificate saying you will get your money back. I think that certainly having strong systems and strong processes in place is an absolute must. You have to ensure that you have a zero tolerance approach– for instance, if your profit and loss statements are due on Tuesday, that’s when they have to come in — no excuses. I am a mother of three kids and I think franchise is like parenting; if you take care of the little problems, then the big ones will never happen.

But how much is you feeding them and where do you draw the line in terms of how much communication you need?

Damian: I think their business is our business and vice versa. We’ve got a marketing department, which is on tap 24×7, so we don’t leave them out hanging. Some of the franchisees are probably our best operators, before we signed them up, they actually rang our marketing department and picked their brains. I think that is pretty smart to do that.

Janine: Our communication strategy is a yearly conference, which is absolutely critical. And we have tried everything, we have tried groups, weekly, monthly and that didn’t work for us. I sit down once a month with my business mentor [Bakers Delight co-founder] Lesley Gillespie. A lot of our systems are actually from her 25 years of business experience, which has been fantastic. So we have cluster meetings monthly, we have state meetings quarterly, we have an annual meeting conference where we go somewhere and that is critical because you feel the culture going and you reinvigorate before summer. We have a marketing partner and we also have a strategic local area marketing person.

James: Franchisees sign up to the system and receive all our intellectual property, which they follow to become successful. If they are expecting something else, if they want to follow something else, they really shouldn’t be in the system. One of the key things is to understand the differences between what we want and expect as franchisors and what franchisees want.

Janine: One other thing that works very well for us is a six-monthly or quarterly Partner Advisory Team meeting. We get a franchisee from each state and brainstorm what’s working and what’s not working. We are very critical of ourselves and it’s really important we have that open feedback. Strong communication strategy from the franchisor is critical for the culture of the business.

Damian: We had our conference two months ago and we knew the franchisees were going to complain about things – you could hear the war drums from a distance. But we are always an open book, they can even ring me at home.

Richard Breden: We provide a software system and I am also a partner of a workplace relations firm. So we have franchisors that come to us. As I understand it, one of the greatest challenges with a new franchise system is getting the franchise up and running. People say, ‘I am a small business owner and I am tired of working on my own. I want to be my own boss but I also want some assistance, so is franchising the right thing for me?’ You have to attract those people. Providing great systems and really selling your system, and the level of support and success you provide are important factors in attracting a limited pool of potential franchisees.

What level of support do most franchisors give their franchisees in understanding the different laws in each state, and managing the business?

Richard: There is a huge level of employment responsibility. One of the main challenges for small business people is ensuring compliance with an everchanging workplace relations system. There are significant legal and business consequences of not complying.

Janine: If you hold their hand too much, they become needy. It’s not just employment laws they have to worry about, it’s also GST compliance, occupational health and safety and so many other things. We always recommend they join the local retail alliance to ensure they can get the information they need. We want to make them good business people. I started with no business experience; I had never hired anyone. But the information is not that hard to obtain. We give them all websites and all they need to know. They have to be an accountable and responsible business owner.

James: The only challenge is if they become reliant on you, or they blame you if something doesn’t work. If it gets to that point, you may as well be operating each individual store. You are right; you have got to show where the support mechanisms are but also to draw the line so they don’t become totally reliant.

Damian: The ideal franchisees for us are people who have been in business already, so they already know most of the things we’ve discussed. So when they became an LP Gas 1 franchise, their turnover probably increased 40% or 50% pretty much overnight. There was no magic wand. We cleaned up the store, we gave it the branding, we did the advertising and it became a brand new store. The reputation was there, people have heard the name — it’s in the Yellow Pages. They’ve got a big ad, so they must be good. Because they are business people, they know all the legal issues. We just supply them the system that works.

Janine: A lot of potential franchisees who come and see us have also checked out Gloria Jeans or Baker’s Delight. But that’s fine because I want them to be as comfortable with us as we are with them. We give them a warts-and-all picture about the journey and always advise them to do their own research and get good legal and accounting advice.

What advice would you give someone starting a franchise?

Janine: If I were looking to franchise my business, I’d first make sure I had a profitable model – at least 12 months under my belt and some really good solid systems. Don’t even go down the franchising path unless you have proven it to yourself. Also understand what you are getting into, because franchising is quite an emotional rollercoaster. You are dealing with other people and their lives. For a franchisee, do a lot of research. Make sure you get good legal advice, spend money on due diligence, get good accounting advice. Make sure you don’t just go to one franchise. Go to 10, research them all and find out what you want. Each time you go to one, you learn a little bit more. It is a lot of investment so it is important that you get it right.

Damian: I would open a few company-owned stores first, so you know how to deal with multiple locations. If you have five stores open and they are all working, it gives you credibility and peace of mind that it’s working. It’s a get-rich-slow scheme. Don’t think you are going to get millions of dollars quickly, because you have to open up 30 or 40 stores before you start seeing a dollar coming through for yourself. A lot of people go in saying they are going to open up 100 stores, but you don’t open them up overnight.

James: I would add that the psyche of the franchisor is important. There has to be a relationship; it is a marriage if I can put it that way. And in a marriage you want both partners to become successful. The business owner has to set up a model whereby the franchisees success is in their eyes as well. If you don’t have that, you are not going to be successful.

Damian: Our most recent franchisee asked, ‘How do I know you are going to support me?’ Which is a very valid question and I tell everyone the same thing: if you close, I stop generating money from you, so it is my best interest to keep you open.