The franchise model is popular in the food and beverage industry. For instance, brands such as McDonald’s and Boost Juice demonstrate success. Although brand-name franchises can be enticing, potential franchisees should conduct their due diligence thoroughly before joining one. For example, potential franchisees should inspect all equipment and understand their obligations relating to the premises. This article explores essential considerations franchisees should make before buying a food franchise.
Inspecting the Business’ Equipment
As with any business, it is essential to inspect the business’ equipment. This is especially important when buying a food-based franchise where specialised equipment can cost a significant amount to replace or repair.
Before engaging a professional to assess the equipment, speak to the franchisor. Some major franchises assist the incoming franchisee (i.e. you) by inspecting the existing franchise and can point out any issues with the equipment. Although, it is usually the existing franchisee’s responsibility to repair or replace the equipment before you come on board.
Therefore, once the purchase is finalised, you accept all responsibility for the repairs (and the potentially significant costs associated with upgrades that the franchisor may require). Suppose the franchisor expects to make any improvements. In that case, you should ensure that the outgoing franchisee organises this before the sale. Alternatively, you could seek a discount on the price based on the cost upgrades the franchisor provides.
A franchisor may expect franchisees to purchase new equipment to account for new food offerings. For example, several franchise networks have upgraded systems or equipment. Therefore, they will require franchisees to spend significant money as a result. Although the franchisor should explain this in the disclosure document as part of the purchase process, it is essential to be very clear on the timing of such upgrades to budget for these expenses (or negotiate a lower price).
Leasing Obligations
When buying a food franchise, you will likely operate your franchise from one premise. Unless it is a mobile franchise, you must understand your obligations under the lease. When considering the lease, consider the following:
- term and Duration of the lease. Ensure that the lease and the option to renew are as long as the term of the franchise agreement.
- rent and outgoings. Assess this against your business plan to ensure you can comfortably pay the rent and outgoings, even if the business isn’t going so well. Also, make sure to project into the future as your rent will increase.
- refurbishment clause. Most shopping centres require refurbishment to the premises before they will renew a lease. This can easily exceed hundreds of thousands of dollars as you will likely be required to restore the premises to base building standards.
- make good obligations. What will be required to reinstate the premises at the end of the lease? Given the substantial financial commitment a lease requires, we advise that you seek legal advice on the lease in addition to the franchise agreement.
Obtain Food-based Licences
Another necessary clause in the franchise agreement is the requirement to obtain all applicable licenses before you start operating. In the case of a food franchise, this clause refers to the State or Territory and local regulations that govern the right for you to operate a business that serves food.
You must obtain the necessary approvals, qualifications and licences to avoid becoming a franchisee. Further, if you lose your qualifications during the franchise term, you will breach the franchise agreement, and the franchisor could terminate the relationship.
Before taking action, first, speak with the franchisor. If you are taking over an existing food franchise, the approval is likely already in place (although it never hurts to have your lawyer confirm). As to your qualifications in professional franchise systems, the franchisor will provide clear guidelines regarding what they require. Generally, their standard training processes will cover the licences and qualifications required (after all, this is one of the benefits of purchasing from an established franchise system). Any licences must be transferred to you on purchase. You can confirm this with your legal advisor.
Franchisees should also check that the existing business complies with current food safety regulations and have no reputation-damaging fines or adverse findings by the regulators. Most states have a register of penalty notices from food authorities. So, if you are buying a business that has recently been publicly named and shamed on the schedule, you could be in for an unpleasant surprise. We recommend checking this register and searching online for reviews and associated news regarding the business before purchase.
Training
Food-based franchises can require extensive and lengthy training of their franchisees (and their employees). For example, McDonald’s is well known for requiring franchisees to undertake between 9 and 12 months of job training. Ensure you clearly understand what you are committing to before commencing the process. You may realise that you cannot undertake six months of training or cannot afford to forfeit any income during this time.
Familiarise Yourself with the Franchise Agreement and the Disclosure Document
The Franchise Agreement
Irrespective of what type of franchise you purchase, the franchise agreement will be the central document governing your relationship with the franchisor. Changes to the Franchising Code of Conduct in July 2021 place heavier burdens on franchisors to disclose certain information to prospective franchisees, including:
- rebates received;
- operational costs; and
- likely capital expenditure.
A Franchise Agreement is a contract with a level of customisation for your specific contracting parties and terms. Therefore, you should take the time to clearly understand your obligations under the franchise agreement, for example:
- initial and ongoing fees, including initial franchise fees, royalty fees and training fees;
- each party’s obligations under the franchise agreement, including equipment upgrades, obligations for ongoing training, and obligations to purchase from particular suppliers for particular goods (such as unique sauces and food supplies you are required to purchase from the franchisor);
- occupation of premises, in particular, whether the franchisee is required to locate the business premise themselves, any criteria the premises must meet, and whether the franchisee must hold the lease directly;
- marketing and social media requirements (including the extent to which a franchisor allows a franchisee to manage their own social media accounts); and
- exit provisions (both for selling and terminating the franchise agreement).
Disclosure Document
The Disclosure Document is a standard form document (prescribed by the Franchising Code) that all Franchisors must have to be able to operate a Franchise. It is the document that summarises all information regarding the franchise network, such as:
- details of the franchisor, including their experience in the franchise industry;
- details of existing franchisees in the network, as well as franchise transfers, terminations and surrenders;
- an itemisation of operational costs and fees, which gives franchisees an insight into the financial viability of the particular franchise network and allows for financial modelling;
- details of intellectual property, such as registered trademarks; and
- the exclusivity afforded by particular territories.
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Key Takeaways
Buying a food-based franchise is an exciting venture. However, before you commit to a franchise term, consider the issues unique to the industry and conduct your due diligence. This means:
- checking your equipment;
- reading through your lease agreement;
- obtaining any licences and qualifications; and
- assessing whether you have the resources to commit to training.
Finally, always remember, if you have any questions – ask!
If you have any questions or need assistance buying a food franchise, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
Another necessary clause in the franchise agreement is the requirement to obtain all applicable licenses before you start operating. In the case of a food franchise, this clause refers to the State or Territory and local regulations that govern the right for you to operate a business that serves food.
The existing franchisee is usually responsible for repairing or replacing the equipment before you come on board. Therefore, once the purchase is finalised, you accept all responsibility for the repairs (and the potentially significant costs associated with upgrades that the franchisor may require).
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