What Should Be Considered When Buying a Franchise? Whether you’re a newcomer to business or looking to expand into new and exciting areas, buying into a reputable and established franchise can be a great way to ensure ongoing success. But there are pitfalls and like any type of business you need to know what to look for and where to go for the right advice.
How long has the business been franchised and how long was it operating before it became a franchise? If you are interested in a franchise that is not in the mainstream, then make sure you look into the experience and background of the franchisor, where the business started, how many outlets it has currently and what the plan is moving forward.
Is the business seasonal? Is it registered with the Franchise Council of Australia and who owns the intellectual property? Once you start delving below the shiny surface of their marketing materials and glossy exteriors, you may start to uncover some startling truths about the business – this could encourage or discourage you, depending on the revelations; but no matter what you discover, you are going to be more confident moving forward.
The other thing is you should be very prepared to work hard. Buying a franchise, like any business start-up, is not a license to print money, lay back and take it easy. The long hours can be gruelling, the staff issues can be daunting, and the everyday running of the business can have you at wit’s end.
In many ways however, that’s where franchising can become a blessing. If your franchisor is worth his salt, he will put the franchise team into action to get you through the hard times. Through experience he can guide you through the ups and downs and make sure your business keeps bubbling along in spite of what may seem like to you, never-ending problems.
Keep at it though, because they will end, before you know it you will be a toughened franchisee and business owner, taking the good with could-be-betters and really enjoying what you are doing. But before you start to relax – there’s a lot more to consider.
Buying a business can be complex and costly. Conducting your due-diligence before entering into a franchise agreement will answer the many questions you may have and a lot more you probably haven’t thought of. The thing is, the list of questions can be extensive, and the answers often require the help of a lawyer or accountant.
Don’t stress, help is out there.
Seeking the services of an experienced franchise lawyer is the most sensible way to work through Pre-Purchase Due Diligence. We understand that there are some questions you could answer yourself, just through a little research and by talking to your potential franchisor, but what about areas like financial performance, legal and tax compliance, customer contracts, royalties and franchise fees?
With the right franchise lawyer, you can rest assured your Pre-Purchase Due Diligence is completed professionally and that you will be purchasing the franchise with complete insight into finance, operations and procedures.
A comprehensive appraisal of your business right now, is going to save you a lot of headaches down the track. Knowing and understanding 100% what you are buying into, will prepare you for what lies ahead. You may think you are saving money by not seeking professional help with your Due Diligence, but how much is the franchise costing you? How much time will you be putting in? How many hours will you spend away from your family?
Let’s face it, this business is virtually going to be the major part of your life for many years to come, investing in some up-front assurances before you make the leap, means you’ll be entering into a Franchise Agreement with a clear mind, knowing there are no hidden agendas or nasties to come out later and bite you where it hurts.
It may sound obvious, but the best advice is often that which comes straight from the horse’s mouth. Seek out current franchisees, shout them a coffee and ask them all about the business. Are they happy, is the business profitable, are the franchisors reliable, trustworthy, supportive and do they demonstrate strong leadership skills?
It’s also important to know that the franchisor team is one you can work with. Chances are you’re going to be just about joined at the hip for many years to come and you want to make sure you are comfortable with the fit of personalities, management and franchisor area managers. Ask current franchisees their opinions and how they get along with the franchisor team.
What type of business is the franchise? Is this something you are experienced in? Is it something you love or are you merely motivated by the almighty dollar? Be sure of the type of business you are about to plunge into. This will be your business and to make it work you will be spending a lot of hours, effort and money, having a passion for what you are doing really helps.
Also look at the area the franchise outlet is located in. You will be travelling to and from here every day. Have you taken your travel time into account? What about the cost of petrol and maintaining your vehicle. These things may seem small by comparison, but in the end it can be the little things that really start to wear on you.
There’s a lot to be said for living locally to where you do business, so buying a franchise close to home is most definitely a wise move.
Besides living locally and knowing the area, delve into the actual territory you believe you are purchasing. You want to make sure that territory you are buying is in exclusivity – if not, what are the boundaries and where do you fit in? Can another franchisee come in and open up across the road? Around the corner?
Perhaps you have been struggling to make a low traffic area work and a new franchisee comes in and opens on the main road – bam goes your custom and your business is rapidly disappearing down the drain. Check it out, get a professional to help you. This is where a good franchise lawyer becomes invaluable.
A really wise move, when thinking about entering into a franchise is to find yourself a lawyer who is experienced in the field of franchising. The right franchise lawyer can help you with more than just your legal franchise documents. A franchise lawyer can help you check out the territory as we mentioned above. The right franchise lawyer can assess the business you are about to buy into and give you valuable advice on the pros and cons of the franchise.
Your lawyer can help you with any issues regarding the franchisee site, particularly the franchisee lease or licence agreement. Your lawyer can also help you decide on the right business structure for you. Company or sole trader? Or perhaps a company/trust structure would be best for you. This decision will play a crucial role in your tax effectiveness and long-term asset protection.
There is also the franchise term. You may not think about it at the outset, but when you are buying a franchise it is not like setting up a business in perpetuity, there is generally a length of term, like ten years. If you are unsure about what the term is, what it means or are not happy with it, your franchise lawyer can explain all of this to you and help you to negotiate a better term where necessary.
If the franchise you are entering into is going to be established in a shopping centre, then you have a whole new minefield to wade through before finally deciding on entering into this franchise. Shopping Centre management can be a law unto itself.
You’ll be paying top rent in a good shopping mall, you can be at the mercy of management when it comes to position – the better the business is the better the position it will be awarded at the mall. You can even get moved from your snug position later down the track if a better tenant comes along – and this can be a business breaker – so make sure you get your franchise lawyer to check out your shopping centre agreement, this is something a lot of franchises just don’t think of and you’ll find your franchisor has little power when it comes to overriding the almighty god of the shopping centre.
There are other demands as well as far as shop appearance and fit-out is concerned but think of the advantages because there are many of them. People flock to the local mall because of easy parking, because everything is under the one roof, because it is a destination and there is always plenty to do at the mall. The shopping mall can be a family day out, a haven away from bad weather or just somewhere to hang out and do a bit of shopping.
So, weigh up the pros and cons, get your lawyer to help you and you will be opening your business with confidence.
Make sure you understand exactly what your commissions are going forward. These can amount to a regular franchise fee, like a monthly payment. On top of this you could be paying a royalty on sales and a marketing fee. These are big players in determining your bottom line, so make sure your franchise lawyer is across these fees and that you understand how they will affect the money you take home in the end. Your lawyer will also guide you in determining whether these fees are fair and just.
The other thing to look out for is undisclosed commissions, often franchisors will negotiate a commission with your regular suppliers. In many cases this could be a good thing as it will lower your commissions paid, but to know these things before you enter the franchise will give you peace of mind.
Above all else, you want to make sure you are protected legally and that the franchise documents you are signing are working for you, not against you. Your lawyer can explain the purpose of a Disclosure Statement and what it should contain. Better still, have your lawyer look over the Franchisor Disclosure Statement, then you can be assured that everything in the Franchisor Disclosure Statement is in order.
Your Franchise Agreement is critical and the right advice on this is paramount. Every Franchise Agreement is, and should be, different. It is the legal document which governs the franchise and your relationship as a franchisee. It sets out all the conditions of the franchise, the obligations of the franchisor and those of you as a franchisee. There are basic provisions in every Franchise Agreement, but unless the Franchise Agreement you are about to sign has been drawn up by a qualified lawyer working for the Franchisor, then you need to be very careful about what you are getting into.
Make sure your lawyer is well versed in franchise law. You can start by checking out their websites to qualify that they have a section dedicated to franchising. Ask them what franchises they represent, and how long have they been practising franchise law? A good place to start here is www.pcllawyers.com.au
Don’t be put off by legalities, formalities and your best friend’s bad experience. There are some great advantages to buying a franchise. You have the independence of a small business without the worry and stresses of marketing – you’ll be part of a network that will attract customers and bring business to your door. You will be trained in the operation of the business and benefit from the experience of the franchisor.
Done right – getting into a franchise is a great move, but make sure you get professional advice and steer the steady path to success. The right legal advice is pivotal in moving forward, more information can be found at www.pcllawyers.com.au
Please note: The above is not intended to be legal advice. Every circumstance is different. Always seek legal advice in relation to your individual situation.
© PCL Lawyers 2020