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If you are looking to start a new business, you may be considering buying a franchise. Buying a franchise is not so different to buying another business. At some stage, you may want to engage a lawyer to help you navigate the legal documents and business purchase process. Your franchise lawyer will want to know that you have considered all the relevant information before proceeding with the purchase. This article will detail the information you should obtain and familiarise yourself with before buying a franchise.

1. Why Are You Buying a Franchise?

This question will provide your lawyer with insight on your motivations and influence the recommendations they make to you. They may also ask for the following information:

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.

2. What Is Your Business Background and Experience?

Your previous experience will guide the lawyer on the detail of advice you need. If you are unfamiliar with the industry, you may have additional questions to ask your lawyer.

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.


3. Due Diligence When Buying a Franchise

If you are purchasing an existing franchise, your lawyer will ask you a number of questions to determine whether you:

  • have completed your due diligence research or 
  • require additional information.

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?

Leasing

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?

4. Monetary Concerns

Your lawyer will need to understand how you plan on purchasing the franchise and whether you are aware of the ongoing costs involved. The franchise agreement and disclosure documents will outline a number of costs. You should also seek accounting advice.

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?

5. Have You Considered Your Business Structure?

Your chosen business structure will affect how you finalise the franchise agreement, and any applicable leases or other documents for the business. Your lawyer will also want to advise you on concerns specific to your structure.

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.

Key Takeaways

When you are considering buying a franchise, you should consider the above questions and be prepared to answer them. This will assist you making your decision and communicating with your franchise lawyer. You will want your franchise lawyer to be fully informed so that they can favourably negotiate with the franchisor or vendor on your behalf. For more information on what kind of information you should start preparing for your consultation, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.


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