Risk Mangement: Pure Risks

There are two kinds of risk, according to Chris Jones -Owner of Chris Jones Risk Management. The first is Speculative Risk; which refers to something that may result positively or negatively: such as putting some coins in the pokies with the chance of double or nothing, or putting your money into a franchise.

The second kind is Pure Risk. With Pure Risk, there is only a negative outcome. For example, the risk of a fire burning down your office/restaurant, the risk of one of your employees severely injuring themselves on the job, the risk of your brand new franchise equipment being destroyed. "Most people buying into a franchise focus on the Speculative Risks instead of the Pure Risks involved," says Jones. "They'''''re so busy thinking about what might or might not make them more money, that they forget to consider the risks that can only result in loss. Yet it is these Pure Risks that should be considered first of all. "Such things as Occupational Health and Safety, Exclusivity, Workers Compensation, Product Liability, and Damage to Specialist Equipment need to be considered in your over all Pure Risk Plan."

While some of the larger franchises have great policies and systems for handling Pure Risks, others leave much of these considerations for handling by the individual franchisee - who might not be in a position to foresee all the risks involved in the particular industry they are buying into.

"Ask yourself: are you buying into a provision of pre-established safety programmes and insurance deals?" Says Jones. "Or is this something you will have to look into establishing independently of the parent company? OHS and Workers Compensation laws are different in each state, and can be quite onerous. Larger franchises are more likely to have established systems and procedures to deal with these issues. " For example," Jones continues, "if you have staff, most states require a rehabilitation injury management programme to rehabilitate injured employees. This may involve the appointment of a properly trained rehabilitation coordinator. If employee injury is a credible risk, then you'll need to make provision either through the franchisor or else on behalf of your own organisation."

OCCUPATIONAL HEALTH AND SAFETY

Check if the companies you are looking into buying a franchise from have a pre-established safety programme/ insurance coverage deals that are part of the franchise package. "You want to be thinking of issues like: what happens if my staff get injured? What happens if I get injured myself, and can't work for a period of time? Does the parent company provide somebody to fill-in for me until I am better? What happens if the nature of the business itself causes me permanent injury?" Jones suggests.

"I'm not saying that if the company does not have these things, you should dismiss the idea of buying your franchise from them. It's just that if you do, you must be prepared and able to set up appropriate OHS systems for yourself. And if you are Outback Jack from Timbuktu, there might not be the necessary insurance and occupational health and safety professionals in your area to work through these issues with and get the coverage you require."

Jones advises researching the laws in your state and the insurance bodies in your area if your parent company is not able to provide such systems, and see if getting independent coverage and policies in order is a viable option.

PRODUCT LIABILITY

Product liability is another little considered area. "If you are buying into a products-based company," Jones says, "such as in the make-up industry, computers or even packaged food products for example, a Pure Risk that deserves consideration is the possibility of the products being faulty, damaged or perhaps even poisonous (if we are talking of food stuffs).

"For this reason you want to know if you can get coverage for what you are producing through your franchise, or if you have to look for this yourself? Again, getting specialised product insurance could be difficult in certain areas. You also want to find out whether or not the products have batch numbers/ codes. If your products are numbered in this way, it will make your life easier in the event of a recall." Jones advises gaining a good knowledge of the kinds of products you will be using in a products-based franchise, the level of coverage available for them and the ways in which these will be delivered to you, before making any concrete decisions.

EQUIPTMENT

Another Pure Risk that is important to consider is the possibility of broken or damaged equipment. For many franchises that deliver special services using specialised equipment (an example might include certain fumigation franchises) no equipment means no services. And no services means no business.

"If you require very specialised equipment for your franchise," Jones says, "you want to know if your parent company will replace this if it breaks or gets damaged in some way, and at what cost. Otherwise, you need to have a good idea of how you would deal with fixing or replacing such equipment through other avenues. "For some specialised equipment it can be very difficult to find repairs people in your area - perhaps even impossible. This might mean that days, weeks or months might pass before you can get the problem sorted and get back to business. What will you use in the meantime?"

Find out what the parent company's policies are concerning replacing and repairing specialised equipment, or if this is something you would easily be able to handle through other contacts in the event of a problem.

ASSETS AND PROPERTIES

The same goes for all of your assets and properties - Pure Risks such as fire, environmental disasters and other little-thought-about issues could arise at any time. "This isn't about being alarmist or pan-icking," Jones says of analysing the many potential negative events that could turn these assets into liabilities. "Rather, considering Pure Risks is about being smart. It's about setting up the necessary coverage so that you can greet disasters with the calm knowledge that you've covered your bases. It's about putting systems and policies in place, or making yourself aware of the systems and policies you are buying, when risks are still theoretical and haven't been actualised." Discuss all the insurance policies and worst-case scenarios with potential parent companies, or the agencies you will be gaining coverage from for your business assets and properties.

EXCLUSIVITY

Another Pure Risk that is pertinent for some franchisees is the possibility of not having exclusive rights to a set, specific area. "If you buy into Joe Blow's Lawn Mowing, for example," Jones explains, "because his good name will get you plenty of customers, and you are allocated a particular district only to discover several other Joe Blow's Lawn Mowing operators working in your suburbs, you will have to deal with very direct competition and financial gain will be hindered."

This can apply to restaurants and cafes, product distributors and service providers of all kinds. Let's face it: nobody likes a competitor, especially not one using the exact same business name.

"Always, always, always find out about exclusivity," Jones enthuses. "Have a good idea of how stable your exclusivity rights are too - will your area be changed from a state to a district to a suburb as the parent company becomes more successful? Or will you be buying some amount of certainty on this regard? "You also should research the other franchisees from the parent company that are working in the areas surrounding where you want to base the business. Work out if you will be able to start up a separate client base or if you will be stuck trying to poach their clients and battling for survival."

By Tiffany Jones of Which Franchise? Magazine