I am buying into a fast food franchise. What issues do I need to consider?

Becoming a franchisee in Australia is increasingly common. LegalVision’s franchise solicitors have been engaged by many clients to review and draft franchise agreements, and to provide legal advice regarding the set up of a franchise business and any leasing implications.

Purchasing a pre-existing business and the right to use its branding can have many benefits. You can benefit from the goodwill and reputation of the franchise by trading under the franchise business name and benefiting from a pre-existing customer base. That said, purchasing a franchise can also be a very expensive investment.

If you are looking to purchase a franchise business in particular, here are a few questions to consider:

What sort of fast food franchise are you purchasing?

Fast food franchises are quite popular in Australia today with the increase in health food trends and convenient meal options for the working population. If you are purchasing a fast food franchise, you should assess the potential for success in the business. To do this, you will need to ask the franchisor for the profit and loss statements of the franchise business for the last few financial years. You should pass these documents on to your accountant and then decide whether you would like to proceed with the purchase of the business.

It is important to keep in mind that just because a business has experienced losses in the past does not mean it will incur heavy losses in the future. Similarly, just because a business has experienced great profits in the past does not mean you are guaranteed to benefit from continued profits in the future. All businesses experience highs and lows, and it is a good idea to discuss these options with your accountant to figure out your game plan.

What is the best method of purchase?

When purchasing a pre-existing fast-food franchise, a major consideration is the way you are going to purchase the business.

Find out whether you are purchasing:

• Assets and goodwill of the franchise business; or
• The shares of the franchise company.

Each of these options has their own advantages and disadvantages.  For instance, purchasing shares in the franchisor’s company may mean that you could receive a portion of the dividends from the company’s profits. However, it can also mean that you can experience losses in terms of the value of your shares, should the company’s profits decrease over time.  People generally will only purchase shares in a franchise business if they wish to somehow partake in the running of the business, such as a person operating a franchise in partnership with another person. However, the most common way to purchase a franchise business is through purchasing the assets and goodwill of the franchise business.

Assets and goodwill are essentially what forms a franchise business, or any other business for that matter. If you purchase the assets and goodwill of the franchise business, you could benefit from working within a network of other franchises whose goodwill and reputation is already established. However, as a franchisee, you will be required to follow strict guidelines set forth by the franchisor, which will give you less control in operating the franchise business.

It is a good idea to have a chat with a franchise solicitor and discuss exactly what you want out of the business. A franchise solicitor can then help you assess what your best legal options are, what documents you will need to prepare and what documents you will need to have reviewed in order to operate a franchise business.

Who owns the business premises?

You should also look at the premises that the franchise business is being operated on. If the franchisor owns the property, you should check to see whether the franchisor will lease the business premises to you for the franchise term. You could also check with the relevant state property register to ensure there are no encumbrances outstanding that might affect the property. For example, if the franchisor has mortgaged the business premises, you should know about this before entering into a lease for the premises. In such cases, you may be required to get the mortgagor’s consent in order to enter into a lease and operate the franchise.

Alternatively, the franchisor may have already leased part of the land out or even sold part of it to another party. The franchisor could also have entered into a lease with the landlord of the premises. As such, you may be required to sublease the premises or you may be required to enter into a new lease, depending on the circumstances.

You should closely review the lease documents to make sure that you know what you are getting into. If you have negotiated terms with the franchisor verbally, you should make sure that these verbal agreements are reflected in the lease documents. Since it’s often hard to review lease agreements in this way, we suggest engaging a franchise solicitor to review the lease documents for you. A franchise solicitor discusses the terms of the lease agreement with you, negotiates any amendments wit the other side and lets you know if there are any hidden risks in the lease agreement that may not be apparent to you.

What machinery and equipment will be needed?

You should also review all of the machinery, equipment and personal property. Has the business leased any of the kitchen appliances? Leasing is often used as a method to lower start-up capital in the business. After all, you don’t want to arrive to your business without equipment to make your burgers. Be prudent, and have a franchise solicitor assist you with making these enquiries.

What other contracts are needed?

Finally, you should review all the contracts of the old franchisee. How many employees has the business hired? Does the business have a good relationship with all of their suppliers? These are all important considerations when purchasing a pre-existing business.  The assistance of a franchise solicitor would certainly make the process less daunting.

Conclusion

Starting a franchise can be a costly investment, so make sure you speak to a franchise solicitor about the legal aspects of purchasing a franchise. Contact LegalVision on 1300 544 755 to speak with one of our experienced franchise lawyers today.