5 Key Legal Considerations Before Buying a Franchise

What are your business goals?

If you have a five to ten year plan, your lawyer will highlight the term or duration of the franchise agreement and how this might affect these goals. Your lawyer may also need to discuss any restraint of trade in the agreement that could affect this goal.

Why this franchise?

It is helpful to understand your motivations and whether you have considered the practical ramifications of the business.

For example, you may enjoy pizza but this does not mean you will enjoy working nights running a pizza restaurant or take-away franchise.

Have you met with or spoken to other franchisees?

Your lawyer will recommend that you contact previous or existing franchisees. They will be able to give guidance on how the franchisor behaves and what your day-to-day will look like.

Have you worked in the same field as the franchise?

Your franchisor may want to provide you with training, and usually a fee is required to be paid.

For example, you might be a professionally trained baker joining a baking franchise. This may affect the level of training required and you may be able to negotiate the training fee.

Have you operated a franchise before?

Are you familiar with how franchising works? Do you understand the level of control held by a franchisor? Are you familiar with franchise agreements and operations manuals?

The answers to these questions will give your lawyer an indication of the detail of advice you require.

Are you familiar with the legal regulations?

Your lawyer will want to address any concerns you have with respect to the Franchising Code of Conduct. If you have worked in the same industry as the franchise previously, you will be aware of any licensing and qualifications you need.

The Inclusions

What is included in the sale? Will it include the goodwill and equipment? Are these items owned by the franchisor or the seller? Is it a share sale or a business sale?

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? What is the agreed territory? Is it exclusive? Is there enough foot traffic to sustain the business turnover? Do you require a vehicle or equipment?

Do you have money to finance the purchase?

Will you require a loan? Is the purchase being financed by the franchisor or the vendor?

The lawyer may need to review additional documents or recommend that special clauses insert to the franchise agreement or sale of business agreement.

Are you aware of the ongoing franchise fees?

Are the fees fixed or a percentage of the business’ revenue? Your lawyer will need to know this information to determine whether what the franchisor has advertised to you is the same as what they have included in the franchise documents.

Has the franchisor provided financial statements or projections?

It is important to understand whether the franchisor has complied with the Franchising Code of Conduct.

Is there a marketing fund?

Has the franchisor provided a financial statement for the marketing fund showing how the fund has been spent in the previous year?  Are you satisfied by this marketing activity and expenditure?

Have you contacted an accountant?

Have you prepared a financial model for the business? Has your accountant given you advice on the viability of the business?

Will you set up a company or trust?

What structuring advice have you received? Your lawyer will want to know whether you have considered how to limit your personal liability.  This is best done by incorporating a company, and you may seek advice from your accountant whether a trust is required.

Do you have a business partner or other investors?

You should document any existing business relationship to protect the businesses interest in the event of a dispute. You may need additional advice on a partnership or shareholders agreement.

Are you required to give a personal guarantee?

If you give a personal guarantee, you will need advice on how this could affect your personal assets or how you can protect them.