If you are looking to buy a business, you may be considering buying a franchise. Buying a franchise could be a great opportunity, especially if you are looking for ongoing support while running your business. This article will outline:

  • how a franchise business operates;
  • the difference between purchasing a new and existing franchise; and
  • the advantage and disadvantages of buying a franchise.

It is essential to fully understand the business and franchise network you are considering purchasing.

What Is a Franchise and How Does it Work?

Franchising is a business system developed by a franchisor and licensed to franchisees. The franchise network is made up of similar or identical businesses, which are operated by independent business owners (the franchisees). The franchisees use the identical marketing structure and intellectual property (IP) that is controlled and owned by the franchisor.

When you enter a franchise, you will sign a franchise agreement. This agreement will grant you the right from the franchisor to:

  • use their IP and trademarks; and 
  • operate your business using their business structure and systems.

Additionally, it is important to know the different types of franchises available to purchase. Each type has varying advantages and disadvantages.

The Franchise Documents

Before purchasing a franchise, you will need to review and consider the franchise documents. The three essential franchise documents are the:

  • franchise agreement;
  • disclosure document; and
  • operations manual. 

Franchise Agreement

Your review of the franchise agreement is a crucial consideration before buying any franchise. This agreement sets out your obligations and the obligations of the franchisor. They can be quite onerous depending on the franchise. The franchise agreement will detail:

  • the number of years you are required to operate for;
  • the fees payable to the franchisor; 
  • your obligations in relation to the operations of the franchise business; and 
  • how the agreement may be terminated.

Disclosure Document

The franchisor is required to comply with the Franchising Code of Conduct (the Code). Therefore, they must follow the disclosure requirements set out in the Code. The franchisor will provide you with a copy of the franchisor’s disclosure document. This document contains critical financial information about the: 

  • franchisor; 
  • franchise network; and 
  • initial set-up costs and ongoing payments.

Operations Manual

The operations manual is also an important consideration, and it is provided by the franchisor. It will set out the business protocols and procedures of the franchise network. Additionally, it often contains valuable business knowledge. You will need to follow the processes in this document while you operate the franchise.

Buying a New Franchise vs Existing Franchise 

Your business considerations will vary depending on whether you are purchasing a new or existing franchise. Before you commit to the purchase, it is critical that you understand the viability of the business.

If you are considering purchasing a new franchise, your research should primarily focus on the:

  • franchisor; and
  • franchise network.

You should review the disclosure document and franchise agreement carefully before you make the decision. You should also contact current or previous franchisees. These individuals can share their experience of being part of the franchise network with you. Further, they can provide you with guidance on what your income and expenditure will be like and give you a practical understanding of your obligations and dealings with the franchisor.

When purchasing an existing franchise, your research should be even more thorough. You will also need to undertake due diligence about the:

  • current business performance; and
  • franchise network.

The Seller of the business can provide you with the business’s financial information and details of its turnover. You can review these with an accountant to assess the viability of the business. 

You should also consider the following factors:

The Inclusions
  • What is included in the sale? 
  • Will it include the goodwill and equipment? 
  • Are these items owned by the franchisor or the vendor? 
  • Is it a share sale or a business sale?
The Lease
  • Is the lease in the franchisee or franchisor’s name? 
    • You will likely need to have the lease assigned to you. 
  • What is the term of the lease? 
    • If the term of the lease is relatively short, you may be required to change premises or enter a new lease under different commercial terms after purchasing the franchise. 
The Location
  • Where is the location? 
  • Is there enough foot traffic to sustain the business turnover? 
  • Are there any major council developments or road works in the area that might affect traffic flow?
The Staff
  • Will you keep the existing staff? 
  • Do they have a right to work in Australia? 
  • Do they have the required qualifications? 
  • Are they being paid correctly? 
  • Are there any outstanding liabilities?

The above factors are all important considerations when purchasing a franchise. You should weigh these up carefully before making a decision. 

Advantages and Disadvantages of Franchising

Existing franchises come with: 

  • goodwill;
  • a customer base; and
  • established methods and procedures. 

Moreover, as a franchisee, you will have access to industry trade secrets and the valuable know-how of the franchisor. Consequently, purchasing a franchise may be an easier option than setting up your own new business. Conversely, in addition to potential high start-up and ongoing costs, there can occasionally be high administrative costs passed on from franchisors. These costs can include marketing fees and royalties. There is also a risk of another franchisee damaging the overall brand. Finally, you will be required to follow the franchisor’s protocols and procedures, giving you less autonomy over the business.

Key Takeaways

Before buying a franchise, you must do your research and due diligence. You will need to consider whether franchising is the best business for you. There are numerous advantages and disadvantages for you to consider. You must do your own research to ensure you fully understand the franchise network you are considering entering into. Additionally, you should contact existing franchisees to learn about their experience with the franchisor. If you have any questions surrounding the legal requirements and implications of joining a franchise network, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.

Frequently Asked Questions

What are the three essential documents to look at before purchasing a franchise?

They include the franchise agreement, disclosure document and operations manual. You should review and consider the information in each of these documents before buying a franchise.

What is included in a disclosure document?

It contains critical financial information about the franchisor, franchise network and initial set-up costs and ongoing payments.

What is included in an operations manual?

It sets out the business protocols and procedures of the franchise network and often has valuable business knowledge included in the document.

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