Purchasing an existing franchise differs from purchasing an existing business and buying a new franchise. This may seem obvious at first, however, once negotiations begin or once you start receiving legal contracts, the lines in the transaction can become blurry. Below, we provide you with five rules as a framework to keep in mind to help you with your purchase of an existing franchise.
1. Know the Difference Between the Vendor and the Franchisor
You need to differentiate between the vendor and the franchisor as you will be entering into two different legal agreements.
One of the agreements is with the vendor. The vendor is the owner of the business and so will be the owner of certain assets that the business owns. These assets can include the equipment, inventory or stock. However, the vendor does not own all the assets nor does the vendor own the franchise system. For example, in most cases, the franchisor will likely own the intellectual property assets.
The franchise, on the other hand, is the business system that the vendor operates in agreement with the franchisor. In most cases, the vendor will be a franchisee of the franchise system. For practical purposes, this means that you will likely need the franchisor’s approval to operate the franchise before purchasing the business from the vendor. If you don’t receive the franchisor’s approval, you may just be buying certain assets from the vendor and not the right to operate the franchise as a franchisee.
2. Find Out About the Term
The term determines how long you will have the right to operate the franchise – that is, how long you can be a franchisee. This differs in every franchise purchase arrangement.
For example, the vendor may have the right to operate the franchise for five years. If the vendor has operated the franchise for two years, you will be able to continue the franchise for the remaining three years in the franchise agreement.
It is important to know whether you will be able to operate the franchise for three years, or whether you can renegotiate this to the original term of five years.
You should consider this thoroughly as you need to know what you are getting out of the business purchase and whether the investment will be worth your while. Although you should ultimately discuss this with the franchisor, sometimes the vendor also has these details.
3. Understand Your Lease Obligations
Some franchises will operate from particular premises. If a premise is tied to the business purchase, some things you need to ask, include:
- Who is on the lease at the moment? Is it the vendor or the franchisor?
- Will the lease be assigned to you? Or will you be provided with a licence to occupy?
- Does the term of the lease match the term of the franchise?
- Will you need to undertake any refurbishments to the premises (either as a requirement from the lessor or the franchisor)?
The lease is an important document that will determine many of your obligations. You should direct any questions about the lease to either the vendor or the franchisor.
4. Consider Taking on the Employees
A sale of purchase ends the employees’ employment with the previous vendor. Therefore, if you are purchasing an existing franchise, you should determine whether or not you want to start new agreements with the employees.
You may wish to ask the franchisor to determine whether or not they have any input on the employees you employ. Here, you should undertake the appropriate due diligence, and seek to find out further details about the employee by conducting an interview or speaking with the vendor. It is important to note that a sale of business will not be complete until at least one employee of the previous vendor is hired as a new employee.
5. Ask ‘Why?’
This may seem like a straightforward consideration, but it does not hurt to ask, or undertake your due diligence to understand why the vendor is selling the business.
Look at the financial statements, the details in any accounting and sales reports and find out about any interactions between the vendor and the franchisor.
You may wish to even seek the professional opinions of lawyers, business advisors or accountants. Although there may be no deal-breaking issues, asking why will help you reach the point to determine whether you should purchase the existing franchise.
If you have any further questions or need assistance with purchasing an existing franchise, get in touch with our franchise lawyers on 1300 544 755.