Some tips when buying a franchise

Franchises are a popular way of starting a new business, but if you are thinking of buying one don't be fooled about potential earnings, the Australian Competition and Consumer Commission has warned.

The ACCC is currently looking into a number of  misleading claims concerning “guaranteed” earnings made by franchisors in the cleaning and home services industry

The watchdog says it has received a number of complaints from franchisees who say they have been promised a minimum income, but, in reality, have generated very little or no income from their franchise.

The ACCC is particularly concerned by franchisors who appear to target people from non-English speaking backgrounds -- people who may not fully understand the agreements they are entering into.

Franchisors must have a reasonable basis for making all income representations to potential franchisees. Those who give misleading information concerning the potential income of a franchise can be subject to litigation and court imposed penalties of up to $1.1 million per contravention.

Those fines are little compensation to those who have bought into a franchise that has turned sour. So we would like to pass on one or two tips from the ACCC when it comes to investing in a franchise.

For a start, beware of promises that you will earn a guaranteed income, as well as ‘get rich quick’ schemes that claim you can make large amounts of money with little effort.

If the franchisor makes verbal claims, ask for confirmation in writing.

Make it a point of speaking to existing and past franchisees of the business you are considering. Their contact details should be in the disclosure document that the franchisor is required to give you before you enter into your agreement.

Remember that you do have ‘cooling off’ rights. An agreement can be terminated within seven days of entering into it or making any payment under it, whichever occurs earlier.

Always get advice from a lawyer and accountant before entering into a franchising agreement or handing over any money.

Prepared by Bob Woodward & Associates: offering you business consultancy, accounting, payroll administration and ancillary services in Darwin, the capital of Australia’s Northern Territory.
http://www.woodwards.co/