Buying a Franchise is a great way to reap the rewards that come with owning a well-established brand name, minus the years of hard work and the financial investment required to grow the business. But, before diving in headfirst, you need to find out more about the Franchise and what it actually means to be a Franchisee.
If the complexities of Franchising scare you… fear not. As experienced franchise lawyers, we are sharing our Top Tips on the 6 Key Things You Need to Consider When Buying A Franchise.
1. Find the Right Franchise Fit for You
During your initial searches, consider the key aspects of a Franchise and determine what would be the best fit for you and your desired lifestyle:
- Is it mobile or premises-based?
- What are the hours of operation?
- Are there any qualifications required?
- Are you interested in and do you have experience in the industry?
- Location (is your territory near your home?)
- Will your territory be exclusive?
You should carefully think about whether the franchise system you are considering suits your business experience, skills, and needs.
2. Make Sure You Can Afford to Buy That Particular Franchise
Though this may seem like we are stating the obvious, buying a Franchise involves various upfront costs that can easily be overlooked including:
the initial Franchise fee – this is the lump sum you pay to acquire the Franchise;
the Franchisors legal fees/ documentation fee – you are likely to be liable to pay the Franchisor’s costs of drawing up and negotiating all legal agreements;
your own legal fees – you need your own franchise lawyer to advise you on the documents;
royalty fees – these are the ongoing (monthly) fees usually based on a percentage of your turnover;
if premises-based: the landlord’s legal fees, any rent upfront, the bank guarantee/bond amount (usually 3 to 6 months’ rent plus GST); and
the day-to-day operational expenses of the franchise.
You need to have a business plan that takes this into account when working out the funds you will need for operating the franchise business. You should also make sure you have all the necessary insurances in place.
Your lawyer can help you determine all the costs of buying and operating the franchise and your accountant can run the figures and do some cost projections to advise you on the financial side.
3. Make Sure You Understand the Difference Between Buying A Franchise and A Normal Business
Before entering into a Franchise Agreement, you must be provided an information statement that you should read carefully to make an informed decision based on the risks and opportunities of the Franchised Business. This sets out very clearly that “When you enter into a franchise agreement ..the franchisor grants you the right to operate a business in line with its system, usually for a set period of time. There is no guarantee you will be able to keep your franchise business after the initial period of the agreement ends”.
Unlike purchasing a regular business, you do not own the business. This means you cannot sell it at the end of the Franchise term. Instead, you are paying for the license to use the established brand, intellectual property, business model, and to sell the branded products and/or services. There are restrictions on how you can use the brand and how you can market the goods and/or services. The Franchisor remains in control of many aspects of the business and has the right to impose minimum performance criteria and perform audits. This can be positive for people with less business experience or those who prefer having guidance, rules, and ongoing support.
4. Make Sure You Are Structured Properly to Operate the Franchise
You need to set up a solid business structure from the beginning. You do not want to be a sole trader buying a Franchise since this structure involves a significant amount of personal liability. Ideally you would want to set up a company and a trust structure for maximum security. We stress the importance of this to all our clients and in our useful article linked here https://riselegal.com.au/should-i-start-as-a-company-or-a-sole-trader/.
If you are buying a Franchise with others, you would need to establish a proprietary company limited by shares and enter into a shareholder’s agreement. We explain the importance of shareholder agreements in our article linked here https://riselegal.com.au/why-do-i-need-a-shareholders-agreement/.
5. Understand What You Are Signing
It is really important to truly understand what it is you are signing. Any time we get phone calls from disgruntled franchisees is usually because they did not seek independent legal advice before they purchased their franchise.
You will receive various important franchise documents such as:
- A Non-Disclosure Agreement
- An Expression of Interest
- An information statement
- A Disclosure Document
- The Franchise Agreement
- A copy of the Franchising Code
It is crucially important that you are aware of your rights and responsibilities under the Code. For example, if you decide to become a franchisee, the franchisor must also provide you with a disclosure document, franchise agreement, and a copy of the Code at least 14 days before you enter into an agreement or make a non-refundable payment. Lawyers, business advisers, and accountants are invaluable in this crucial stage to provide advice certificates and clarification to help you understand what each document entails before you are locked in. You may spot clauses within an agreement you would like to negotiate or questions with the franchisor before signing. There may be specific things you want to request as special conditions.
6. Do Your Due Diligence
You should always do your homework before making a big investment – whether you are buying a car, a house… or a Franchise. Fortunately, a Franchisor is required to provide a Disclosure Document to potential Franchisees. You should make sure that the Disclosure Document is up to date at the time you are receiving it. This document reveals the Franchise history, information regarding intellectual property.
The Disclosure Documents also contains a list of all the Franchisees that own franchises and their details. This is hugely helpful information. You should contact at least 2 current franchisees in your local area and find out as much as possible. This allows you to gain insider knowledge about the franchise and from someone already operating as a Franchisee.