You’ve decided you want to venture into the world of small business and have decided to try franchising. But where do you start? This article will go through 3 key things you should know before buying a franchise.
1. Know if the Franchise is Suitable For You
You may hear of certain gyms or coffee houses popping up all over town so think this must be the way to go. It is important to take a step back and think about your reasons for wanting to enter into a franchise. Finding a franchise brand and model that is suitable to who you are as a person as well as the goals for your business is essential to making your franchise a success. If you hate going to the gym, then there is no point purchasing a gym franchise. If you are going to be working in your franchise, you must find something you enjoy doing and something that fits your lifestyle. For example, you may love working outdoors so a gardening and mowing franchise may be a great fit. Understanding your big picture reasons for wanting to buy a franchise is the first step to help you in finding the one most suitable to your needs.
2. Finding the Right Business Structure
Once you have decided on the franchise that you are passionate about and want to make a success, you need to know how you are going to operate that franchise. Deciding on the right business structure for your goals is essential early on before you enter into any agreements with the franchisor. You may find that a sole trader structure is suitable for you because it is easy to set up with little to no regulatory requirements. However, as a sole trader, you are personally liable for the debts of your business. If you wish to protect your personal assets, then a company structure may be most valuable. Although more difficult to set up and with more regulatory requirements, a company is a great structure for franchisees to protect your personal assets and the company operates as a separate legal entity. Similarly, a trust structure with a corporate trustee can protect your personal assets while presenting tax advantages. It is best to speak with your accountant and your solicitor about the structure most suitable for what you want to achieve with your franchise.
3. Reviewing the Franchise Documentation
You now have your business structure set up and have put in an offer to purchase a franchise with the franchisor. If you are going to set up a new franchise location, then the franchisor will provide you with the franchise agreement, disclosure document and financial reports of the franchise. If you are purchasing an existing location from a previous franchisee, then you should receive the documents mentioned from the franchisor, but also a sale of business agreement from the previous owner. You will need to have a solicitor review these documents, as well as any associated lease documentation, to make sure the agreements you are entering into are going to be in your best interests. Your lawyer will set out what your obligations are under each agreement and will explain to you if you need to address any issues. They can help you negotiate with the franchisor, the previous owner, and the landlord (if relevant) to ensure you are getting a fair outcome.
These three key things to know before getting involved in franchising are essential to get you started down the right path. If you fail to consider these points, you may find yourself in a sticky situation down the line. At that point, it will be much harder to re-evaluate whether this franchise, your business structure and the legal documentation are right for you. If you have any questions, ask our franchise lawyers.