A conversation that is taking place around lots of Australian dining tables at the moment goes like this: one of the family's breadwinners has lost his or her job and is wondering what to do with the redundancy payout. On the list of options are paying off a chunk of the mortgage and other debts, putting money into super, taking a holiday or buying into a franchise and becoming a small-business owner.

As the economy moves through a serious downturn and more people contemplate the prospect of unemployment, the franchise industry is gearing up for a period of growth.

The executive director of the Franchise Council of Australia, Steve Wright, says if the pattern of previous downturns is repeated, a lot of money is going to be invested in franchise licences over the next couple of years.

"Owning a small business is one of those dreams that many people have," he says. "A redundancy is a time to assess where you are going in your career and if you have a payout, you have the means to invest in a business."

He says the appeal of franchising is people who have no experience in running a business can buy entry into an operation that is already established, has a recognised brand and marketing strategy and provides support.

He argues that, as with any business investment, there are no guarantees but a franchise is a safer entry into small business than going it alone.

This is certainly the perception among people who buy into franchise systems. A survey of potential franchisees (people who planned to buy a franchise in the next two years) commissioned by the broker Mortgage Choice found the most common reason for going into a franchise was the view that it was safer to run your own business than have a job in someone else's hands.

But it is safer?

Given the recent failure of Kleenmaid, a white-goods retailer operating as a franchise system, and complaints by Wizard Home Loans franchisees about the way the sale of their franchiser company to Aussie Home Loans was handled, the view that franchising is safer needs to be examined.

The director of the Asia-Pacific Centre for Franchise Excellence at Griffith University, Lorelle Frazer, says she agrees with the idea that a franchise has the right make-up for an investor getting into business for the first time but says there is no evidence that the outcomes are really better.

Frazer says: "People often cite the Australian Bureau of Statistics finding that 40 per cent of small businesses fail in the first two years. What the ABS is measuring is exits and we don't know if those exits are due to business failure, change of ownership or some other cause.

"Our own study shows that the average time a franchisee spends in a franchise system is seven years. At first sight, it looks as though franchisees have a better survival rate than other small businesses but we are not comparing apples with apples."

Every two years, the Asia-Pacific Centre for Franchise Excellence puts together a report called Franchising Australia. What the latest study shows is that many franchise systems are relatively new and untested in a recession, many are too small to remain viable long-term, turnover in the industry is high and there is a high level of dispute within systems.

One third of systems started up between 2000 and 2005 and one fifth since 2006. That means half the franchising systems currently operating are creations of Australia's recent economic prosperity.

Between 2004 and 2006, the number of systems increased by 100. There were 200 new entrants and 100 that ceased franchising, so for every two new ones, one got out.

The median number of franchise units per franchiser is 20. According to the centre, "half the franchiser respondents hold very small systems that will not be economically sustainable unless the systems continue to grow".

Retail trade accounts for 28 per cent of franchise systems, 16 per cent are in accommodation and food services and 15 per cent are in administration and support services.

Of the people who buy a franchise, only 43 per cent have independent business experience prior to becoming franchisees. And 40 per cent had no salaried career or business experience in the industry in which they had chosen to invest.

Left in the dark

Frazer says the biggest risk in investing in a franchise is that events outside the control of the franchisee could hit the business. Franchisees often report they are left in the dark by the franchiser and have trouble getting reliable information when the system is in trouble.

In May last year, the Klein Group, a discount jewellery retailer that had been in operation 24 years and had 150 franchise outlets, was put in the hands of an administrator after its owners said they could not service $20 million of debt.

One franchisee, Jo Berthon, who operated a Klein store in western Sydney, told the ABC it was difficult to get information from the company. Calls to the head office were always met with the response that "everything was fine".

Klein Group administrator, Ferrier Hodgson partner James Stewart, wrote an analysis of Klein's failure for a client newsletter. He described the position of the franchisees as being "hostages to the company's fortunes".

This observation tends to undermine the perception that investing in a franchise gives people greater control over their livelihood than being a salaried employee.

Stewart said a host of new competitors moved into the discount jewellery and accessories market over the past decade. Klein needed to refresh its brand and create a point of difference that would keep customers coming back. It failed to do that.

It compounded its problems by being over-generous with rental subsidies and income guarantees. As business started to slow, it was locked into an expensive cost structure. Wright says competition and management issues affect all businesses. He says there are plenty of cases of franchise systems overcoming problems independent small-business operators could not hope to manage on their own.

"Last year the chief executive of Clark Rubber, Chris Malcolm, made some very pessimistic remarks about the outlook for the economy and for his business," he says.

"He believed the looming recession would hit a bulky-goods retailer like Clark Rubber hard. The company took some action, closing three of its franchise stores and cutting costs throughout the network. The business is in a stronger position now and recently announced that two of those stores would re-open."

Stranded

The failure of Kleenmaid, which was put into liquidation in May, will dog the franchise industry for some time, following the emergence of accusations that the franchiser treated its franchisees badly.

An electronics and appliance industry newsletter, Current, ran a story quoting an anonymous Kleenmaid franchisee saying a group of franchisees contacted the Australian Competition and Consumer Commission in 2004, complaining about some of the company's practices.

According to the source, the complaints were that the company misrepresented the performance of Kleenmaid franchises in its marketing to franchise applicants, it passed off used product as new and changed terms of sale, such as customer guarantee conditions, without giving notice.

The ACCC brokered mediation between the company and disgruntled franchisees and the matter rested there. According to the report, when franchisees went back to the ACCC with complaints that the company had not acted in good faith during mediations, the commission said it did not intend to take the issue any further.

According to the Asia-Pacific Centre for Franchising Excellence, 17 per cent of franchisers reported having been in a dispute with at least one of their franchisees in the past year over a matter that ended up being referred to an external dispute-resolution organisation. Causes of disputes include compliance with the system, territorial issues, communications problems and fees.

The situation facing Kleenmaid franchisees now is that they can continue to trade under the Kleenmaid name while they run down their stock. At that point, they relinquish the Kleenmaid name.

According to Deloitte, which is handling the Kleenmaid liquidation, some of the franchisees are creditors, who were owed commissions by the franchiser when it failed. Others are debtors, who will be pursued for payments still owing.

The Kleenmaid situation is complicated by the fact it is an "asset-less administration", which means that there is no money left in the business to fund the liquidation. The administrator has to apply to the Australian Securities and Investments Commission for funds to carry out its work. The matter could drag on for some time.

Forced to move

The ACCC was also required to take a look at the conditions of the recent sale of the Wizard Home Loans franchise to Aussie Home Loans. Wizard was part of GE Capital, which has been cutting back its Australian activities over the past year.

A condition of Aussie's deal with GE was that GE would waive certain fees payable by Wizard brokers and their clients but only if the Wizard customer refinanced through Aussie.

Wizard franchisees were concerned they were being forced to deal with Aussie when they should have been free to recommend the most appropriate alternative to funding through GE.

Some of the Wizard franchisees were also concerned they would be forced to move to different areas to avoid overlaps with Aussie franchisees. A Cairns broker complained he had been told to move his business to southern Queensland, a Bendigo broker said he was asked to move to Ballarat and brokers in Hobart and Launceston in Tasmania said they were told to move to Victoria.

The ACCC did not intervene in the merger of the two broker networks and the Commonwealth Bank, 30 per cent owner of Aussie Home Loans, has since reported that 80 per cent of the Wizard brokers signed up with Aussie.

According to the Mortgage Choice potential franchisee survey, the appealing aspects of a franchise are the established brand and business model, higher likelihood of success, support provided by the franchiser and the collaborative nature of the franchisee network.

The franchise industry has done an excellent job of selling its strengths. But aspiring franchise investors need to be clear about the risks they are taking when they decide to buy into a system.

You're buying a lot more than a job

David Coates, a Mortgage Choice franchisee, says it took him a while to get the hang of franchising and the mistake he made at the start is one lots of people make when they get themselves into a franchise system.

Coates thought he was buying himself a job, not investing in a business, when he bought a Mortgage Choice franchise seven years ago.

"I have to admit, I was a slow starter in the first few years," Coates says. "I treated it like a job. I would come in to work, write my loans, see my customers and get my income.

"I had no vision of the franchise as a business. The penny dropped after a few years, when I realised that at some point I would want to get out of the industry.

"To get some value out of my investment, I would have to start developing the franchise as a business.

"A lot of people who come into franchising are the same. They have never run their own business before and they see themselves moving from one kind of job to another."

Coates was an information technology consultant before getting into mortgage broking. He had had no experience running a business.

He says he was fortunate in that, once he realised he needed to develop a business strategy, the Mortgage Choice franchise system had the resources to support him.

"I took some training courses and started networking with other franchisees. I came into contact with people who had developed sales systems that could be replicated when they hired staff.

"I met people who were planning to own several franchises. I learnt how to get more referrals."

Coates now has two employees in his business and is planning to take on a third person in the next few months. He says the business is continuing to produce good revenue in the downturn because his business development has created a broad customer base.

Coates' advice for anyone thinking of joining a franchise system is to talk to some of the franchisees already in the system and find out what sort of business development support the franchisor offers.