28 Jul Franchise Purchase checklist
Even before a buyer obtains legal or accounting advice, a prospective Franchise Buyer should consider our Franchise Purchase Checklist of items. This will save time and money and ultimately result in a better decision. We have set out some of these checklist items below:
- Research – Undertake some research to ensure that you understand the Franchising Industry and how it operates. There is a code of conduct in Australia that governs the Franchising Industry. The ACCC produces information booklets which can be printed from their website. There is an abundance of information available on the internet. It is best to start with a foundation of knowledge before any other steps are taken and before speaking with to any Franchisors or advisors.
- Risk Assessment – Recognise that the same risks that apply to any business venture, also apply to Franchising. The product or service must be assessed in the same way that any business and business model must be assessed. We have seen Franchise systems that have worked successfully in New Zealand and in other parts of Australia but, which have fail on the Sunshine Coast. A successful business will always be responding to demand. A Franchisor can never guarantee that demand for their product will continue to exist without adaption. Lawyers and accountants will not assess the impact of new competition, demographics or changes in technology etc. This is part of the due diligence that the buyer/franchisee must undertake.
- Competition – Before speaking to any particular Franchisor within an industry make sure that you have identified and investigated all of the alternative Franchisors within the industry. You must dig more than skin deep. What is the growth record of the Franchisor? Has it grown too quickly or is it shrinking, each is a potential problem? How long has the system been established? What is the brand recognition of the franchise? If most consumers have not heard of a particular Franchise System, why are you paying for good will? Is the level of competition increasing or decreasing and why?
- Head Office – Is the head office stable. If the managers, relationship officers, and other employees are not stable, this can be a warning sign. Has the franchise system recently sold?
- Term – What term will be allowed. If no options are offered then you need to be sure that you can recover the capital that is invested and turn a profit in the first term of the franchise agreement. If no options are offered you must assume that the franchise agreement will not be renewed. Unwritten promises are worth nothing! If the franchise system is a small start up system then it may take some time to become profitable and it would be wise to insist, in this case, upon an option to renew the agreement.
- Franchisor Responsibility -Many franchisees assume that it is the Franchisors responsibility to help the Franchisee succeed. Courts have regularly ruled that this is not the case. Make sure you know what you are getting for your money. As a general rule the vast bulk of the franchise agreement favours the Franchisor. For legal reasons this is common, even in very reputable systems. A Franchisor generally offers no more than the right to use the intellectual property, being the brand and the system of doing things. I repeat, franchise agreements do not protect franchisees.
- Training – Many Franchisors offer training however training is often at the cost of the franchisee. Most Franchisors will not provide training before the franchise agreement has been signed. A buyer should assess the quality of training by speaking with other franchisees.
- Communication is a key – Communicate with other franchisees as informally, and as much, as possible. Franchisees are very reluctant to say anything negative about a franchisor to a prospective buyer as the franchisee relies upon the franchisor for their livelihood. Try to read between the lines. The seller of an established business of course will not criticize the franchisor as their aim is to achieve a sale.
- Territory investigation – Understand the particular characteristics of the territory and the premises relating to the Franchise. How many of your customers live in this area?
- Fees – Understand all payments that you will be required to make including payments such as “sale fees” which can be as much as 15% of the value of the business. Sale fees in particular have the ability to erode capital and decrease the value of the asset.
- Advisors – Use your advisors as a sounding board and make sure that they understand the industry.
- Motivation – Properly assess your reasons and objectives for purchasing a franchise. Why are you buying a franchise rather than buying a business that does not contain the restrictions that a franchise will inevitable impose?
- Disclosure – Read and understand the Disclosure Document. Have your lawyers assist you with this process. Although the disclosure is very long and may contain some useless information it will also contain very important information such as – whether there have been disputes between the franchisor and any franchisee, a summary of all expenses, the contact details for franchisees, details of terminations of any franchise agreements, details of any failures to renew a franchise agreement and much more.
We wish you well.