Buying a franchise is the equivalent of buying your own business with additional requirements imposed by the franchisor. The purchaser of a franchise should be aware of all the obligations and the rights being handed over as well as the details of the franchise agreement before they sign on.
1. Purchasing a business
When you buy a franchise, you are essentially purchasing your own business, therefore consider the same issues as you would when starting or purchasing any other business. For example, have you registered your ABN? Do you understand your tax obligations? Are you able to meet the financial requirements? Note that under the Franchising Code of Conduct, the unlikely ability of the buyer to meet financial obligations are grounds for the franchisor to withhold consent to sell the franchise to you.
Ensure that you conduct due diligence, which will help you assess the risks and values associated with the business. Since it is a franchise and an established business, also consider the history of the franchise and the market it is operating in. It is a good idea to understand why the franchisor is selling – how long have they been in the business for? Is the location unprofitable for the franchise? Also examine the business’ financial records and statements, looking particularly at sales patterns or trends in recent years. If there has been a decline, ensure that you understand why and how it can be remedied.
2. Familiarisation with the Franchise Agreement, Disclosure Document and Code of Conduct
The franchise agreement and disclosure document dictate the law for all franchisees and it is good practice to familiarise yourself with this document before entering into the franchise. Often, the agreement and disclosure document may impose fairly strict requirements on the franchisee, hence the buyer should be aware of their obligations at the outset. For example, franchises often have strict fees that must be adhered to in addition to the initial service fee, such as a continuing service fee and advertising fee. These amounts will vary depending on the franchise brand and it is important to ensure that your finances can cover these fees.
Similarly, the buyer should be aware of his or her rights under the Franchising Code of Conduct and what the franchisor can or cannot require them to do. For example, a franchisor is not allowed to require a franchisee to sign any general release of liability of the franchisor, however most franchise agreements will have an indemnity clause relating to breach of the franchise agreement.
3. Exit Plans
It is important to have an exit plan before buying a franchise. Some franchisors will even require this or train their franchisees in this to ensure they are aware of what is needed to build a business ready to sell. Similarly, some franchises will already have a built-in system of a resale program that all of its franchisees are made to follow. The advantage of buying a franchise with this system already in place is that you know there is definitely an exit strategy in place and that the franchisor understands most of its franchise owners will want to sell their stake in the business at some point.
Also of note is to know how termination by the franchisor may occur. The termination clause in your franchise agreement will typically set this out, and it will state the obligations of the franchisee and franchisor in the case of such termination – notice will usually have to be given and the franchisee may be required to meet additional legal costs.
Essentially, as the purchaser of a franchise, you should be aware of your legal responsibilities in the long term. In particular as the franchisee, you should understand your obligations to the franchisor. If you have any questions, get in touch with our franchise lawyers on 1300 544 755.