A franchise can be a very worthwhile purchase for a person looking to establish his or her own business. A franchise can provide the alluring combination of an established business name with the relative autonomy of running your own business. That being said, when a potential franchisee is contemplating purchasing a franchise, he or she must conduct due diligence and aim to invest in a suitable franchise.
This article considers a number of matters a potential franchisee should consider when deciding whether to take the leap into the world of franchising.
Is Franchising for you?
The first question to ask is whether you have the personal and business skills necessary to run the franchise?
In this regard, it is imperative that you have both staff and time management skills, along with client skills and the ability to comply with the franchisor’s requirements (such as reporting requirements/ uniform/ training requirements etc).
It is crucial that any potential franchisees considering purchasing a franchise obtain professional advice, notably:
- Legal advice;
- Financial advice; and
- Business advice.
The importance of due diligence for the prospective franchisee cannot be stressed enough.
There are many factors that you should consider when undertaking due diligence. The following is a list of basic items, however it should be noted that this list is not exhaustive and will vary between different industries/ types of franchises:
- Request and review the Disclosure Document (discussed below);
- Consider the potential customer base of the business;
- Is there an opportunity to expand the business?
- Is the business in a good location?
- Is the business visible to passers by?
- What is the franchise territory?
- Is the franchise territory exclusive or non-exclusive?
- Is there a right of first refusal for additional franchises in the area?
- What are the leasing arrangements going to be if Premises are required?
- What would rental or other costs of the business be?
- Have you spoken to other franchisees in the franchise network you propose to enter?
- What costs will you need to pay? Look at initial and ongoing costs?
- What are your reporting requirements to the franchisor during the term of the agreement?
- Will training be ongoing?
- What will the costs of training be?
- What is the term of the proposed agreement? Will there be an option to renew the franchise agreement?
The Disclosure Document
Throughout Australia, a Franchisor must provide all prospective Franchisees with a Disclosure Document, copy of the Franchising Code of Conduct and Information Statement at least 14 days before entry into the Franchise Agreement.
The purpose of the Disclosure Document is to disclose all relevant matters relating to the franchise to a prospective franchisee before entering into the franchise agreement.
The Disclosure Document should be reviewed closely, noting a list of past and present franchisees should also be included with the Disclosure Document. You should contact these franchisees to discuss their experiences in running the franchise and assess whether the business is for you. A good question to ask an existing franchise is, “if they had their time over, would they buy into the franchise again?”.
How can LegalVision help?
LegalVision has helped countless franchisees decide whether purchasing a franchise and entering into a franchise agreement was a good idea.
Using a fixed-fee structure, we can review your franchise agreement and other documents (including the disclosure document) and provide a written advice and complimentary follow up phone conference to discuss the advice. This will assist you in understanding the commercial and legal implications of the franchise agreement before you enter into the agreement.
While not an exhaustive list, we look at the following issues in our review:
- the contents of the Disclosure Document;
- the Franchise Agreement, including:
- costs of the franchise (initial and ongoing);
- your rights and obligations under the agreement;
- whether you are required to lease premises and equipment;
- the rights and obligations of the Franchisor and whether the franchisor can impose unfair terms upon you;
- termination and exit provisions;
- whether you are able to sell your business/ assign the franchise;
- any unfair provisions; and
- suggesting amendments to the agreement.
It is crucial that you get good legal advice before purchasing a franchise.
Call one of our experienced franchise lawyers today on 1300 544 755. We look forward to assisting you making your business dreams a reality.