What To Take Into Account When Buying A Franchise

Written on the 24 March 2008 by Elisabeth Ritchie - HWL Lawyers

The purchase of a franchise business is different from the purchase of an independent business. As a franchisee you will be party to a long-term relationship with your franchisor and you will agree to run the business in accordance with the franchisor’s system.

Buying a franchise has the advantages of offering many benefits, such as:

• A uniform, consistent business that often relies on a successful formula
• Support from the franchisor in respect of knowledge relating to management, industry, marketing, advertising and buying power
• Use of an already established business name and format and a reduction of business risk

It also involves the payment of fees and/or percentages of turnover to the franchisor, a reduction of independence through franchisor control of management, and there may be factors that adversely affect a franchisee that are outside its control, e.g. reputation risk.

Before buying into a franchise you will need to evaluate the franchise opportunity. You will need to assess the business itself, the franchisor, other franchisees within the system, financial matters, what your obligations and entitlements will be, and decide whether you want to be a franchisee. You will need to consider the advantages and disadvantages of a franchise business, and have read and understood the franchise agreement and disclosure document provided by the franchisor.

Make sure you obtain relevant information

The following are important factors you must give consideration to.

• The information provided in the disclosure document. This will give a useful insight into the current status of the franchise system.
• The business model – How successful is it? Does it have a solid business plan and marketing strategy? Is there a demand in the marketplace for the goods or services on offer? Are there other competitors?
• The track record and/or reputation of the franchisor – How long has it been in the business?  What are its motives for franchising?  Has it complied with the laws in relation to the business?
• The support the franchisor will provide to you – Product supply, service support, advertising, marketing, reputation, site location, operations manual, policies, guidelines.
• How other franchisees are faring in the same network? The franchisor is obliged to provide you with details of other franchisees in the network in the disclosure document. You should be able to contact franchisees directly and ask frank questions about their experiences.
• How much will it cost? This includes start-up costs, working capital, operating expenses (including administration, marketing, staff, signage, customer service expenses), royalties, and other associated expenses.
• If goods are supplied by the franchisor – What are the terms of trade? Can you purchase goods from outside the franchise network?
• The franchise agreement – What is the term of the franchise? Can it be renewed? What happens when the franchise ends? What are your obligations?
• The location of the franchise - Where will your franchise be located? Is there a lease on the property? If so, can it be assigned? What territorial rights will you have? Are they exclusive? Is the territory clearly defined? Will you have a choice of territories?

The warning signs of a 'dodgy' franchise

If the franchise business you are interested in displays any of these signs, it would be wise to end your negotiations with them - chances are they aren't reputable and are just trying to rip you off:

• Franchise businesses advertised with only a post office box number as identification.
• Franchisors that are reluctant to provide any information in writing.
• Franchisors that require you to part with large sums of money without providing you with sufficient information.
• Franchisors that are reluctant to give details of other franchisees within their system.
• Franchisors that claim that you can make large amounts of money quickly with little effort.

When evaluating your franchise business opportunity you should carefully assess all aspects and obtain advice from experienced professionals such as solicitors, accountants, financial and business advisers and franchising consultants. You will need to consider whether you will enter into the business as an individual or through some form of business structure. You will need to consider the tax implications of entering into a franchise business.

Franchise agreements and disclosure documents are essential documents requiring careful examination. You will need to obtain legal advice on these documents. You will need to be aware of your rights as a franchisee set out in the Franchising Code of Conduct.

Prepared by Elisabeth Ritchie, Partner, Home Wilkinson Lowry

www.hwl.com.au

Elisabeth Ritchie is the head of the firm's Franchising and Licensing Cell. The firm provides specialist advice to both franchisors and franchisees. Elisabeth regularly advises in relation to the set up and purchase of franchises, as well as presenting franchise workshops and seminars.
For further details please contact Elisabeth by email here or (02) 9334 8649.