02 Jan How to buy a Franchise – the process and some legal issues
Seek legal advice before you go too far! Riba Business Lawyers can undertake a thorough review of the Franchise Agreement you are considering. They have read hundreds of different Franchise Agreements and can tell you what is normal and reasonable. Small firm legal fees and big firm knowledge.
START BY UNDERTAKING SOME RESEARCH
What are my strengths and weaknesses and how do these suit the requirements of the business?
What are the demographics of the area in which the business would operate?
Why does that demographic suit this kind of business?
What do I expect a Franchisor to do for me that I could not do for myself?
What is the real cost of entering into the franchise system and does the benefit weigh up?
Going into a franchise means setting up a business and, as with any business, there needs to be the demand for what the business sells in the territory in which the business is located in order for the business to succeed. Just because a business is successful in one area does not mean that it will succeed in another.
The idea is to make a return on your investment and receive income from your labour. You should first write down all of the Business’ sources of income, all its costs and expenses and everything else which could impact on profits. What volume of business will be required to pay your wage and make a return? Can you achieve the necessary volume of work?
Is there direct competition? Is your Business’ product or service superior to the competition? Is it highly sought after?
Try comparing your Franchise system with Franchise systems for similar types of businesses e.g Donut King v Fantasy Donuts
Once you’ve made some initial decisions you should look more closely at the Franchise system you’ve selected as your primary goal. At this stage you should:
• Sit down and talk with your Franchisor – What’s their vision? What are their requirements? Do you meet their criteria for a franchisee?
• Go and speak with existing franchisees – Ask if they are happy? What do they like about the system? What don’t they like? Make sure you read between the lines. People don’t like to criticise their franchisor.
Franchising in Australia is governed by the Franchising Code of Conduct. The Code provides:
• certain restrictions on Franchise Agreements;
• sets minimum standards; and
• provides you with certain rights.
A Franchisor must, at least fourteen (14) days prior to you entering into a franchise agreement and paying a non-refundable deposit, give you:
• a Disclosure Document;
• a copy of the Franchising Code of Conduct; and
• a draft copy of the Franchise Agreement.
You should use the fourteen (14) days provided under the code to complete your investigation of the Franchisor and the Franchise system. The Disclosure Document will provide you with information in relation to the Franchise System and the Franchisor. Make sure you get a Disclosure Document. These documents often contain a lot of information. Please contact us if you want assistance to understand the documents.
Some things you need to know before signing a Franchise Agreement:
What costs will you incur when entering into the Franchise Agreement and what on-going costs will you incur?
These costs may include:
• Initial Franchise Fee.
• Royalty or Administration Fee.
• Marketing or Promotion Levies.
• Other advertising requirements contained in the Franchise Agreement.
• Other ongoing fees payable to the Franchisor or a third party.
• Training Fees.
• Renewal Fees on any option.
• Sale fees to transfer the business should you decide to sell.
• Costs relating to the premises from which the Franchise will operate.
• Legal costs of the Franchisor/documentation drafting costs etc.
• Duties and search fees.
Will you be provided with an exclusive territory?
Can your territory be changed? If so, how?
Can the Franchisor operate a similar business within your territory?
Is there any actual or threatened litigation?
The threat of litigation could turn into legal proceedings in the future, hopefully not after you have taken control of the business.
Sometimes even the best plans fail. How can you get out of the Franchise Agreement? What will it cost you to get out of the Franchise Agreement?
Term of the Franchise and any options
How long is the initial term? The term should be long enough for you to recover your initial and set up costs.
Are there any options? How do you exercise your option? Will any new agreement be on the same terms? What costs are involved in the exercise of an option? How long is the option period?
Minimum Performance Criteria
Is there any? Is it reasonable? Will you be able to meet it?
Where does it come from and what restrictions exist? Do you have a right to sell the whole of the range?
Transfer of your franchise
A request for a franchisor’s consent to transfer a franchise must be in writing. A franchisor cannot unreasonably withhold consent. The reasons for which the franchisor may withhold consent are set out in Item 20(3) of the Code.
If the franchisor does not respond in writing stating that consent is withheld, and given reasons for withholding consent within 42 days, then consent is taken to have been given.
Speak with your Financier about:
1. The availability of finance.
2. The financier’s requirements for the provision of your finance.
3. Any necessity to provide security/mortgage.
4. The estimated date that funds will be available.
Some financiers have arrangements with certain franchise systems.
Speak with your lawyer about:
1. The terms of the Franchise agreements, any associated contracts and documentation, and any special conditions you may require.
2. Any representations which may have been made to you by the franchisor upon which you are relying.
3. Most Franchisors will require you to obtain a certificate to say that you have received legal advice.
4. Restraint against trade i.e. whether you may operate a similar business outside your territory.
Get advice from your consultants
If you cannot afford to get advice then you cannot afford to go into business!
Get advice from your accountant
1. The correct entity to buy the business. (Would it be best to set up a company or a trust?).
2. Reviewing any projected figures provided by the franchisor.
3. How does GST affect the transaction?
4. Cashflow, business plan and a budget for the purchase and operation of the business, incorporating the establishment costs and ongoing franchise costs.
How can you protect yourself?
1. Seek legal advice before you go too far. We undertake a thorough process to review your franchise agreements. We have read hundreds of different franchise agreements and we can tell you what is normal and reasonable and what is not.
2. As with any business, prospective franchisees should carefully consider whether or not the type of business meets their requirements and financial circumstances. Important things to consider include the upfront cost, duration of the agreements, and the exit options available.
3. Carefully read the Disclosure Documents and Franchising Code of Conduct.
4. Write everything down. By writing down all the franchisor’s pre-contractual verbal representations and sending them for confirmation to the franchisor before entering into the contract, you are covering yourself against potential misunderstanding later on. This may also be done by email
Before you get any advice, make sure you read all the documents thoroughly. Even if you do not fully understand the documents you will be in a better position to ask good questions of your lawyer, your accountant, and the franchisor. This may also help you to save some costs.