Practical Considerations for Buying a Franchise Business

by DC Strategy 4th of February, 2020

Practical Considerations for Buying a Franchise Business

Investing in any business opportunity, whether it is a franchise business or stand-alone business, is a daunting experience. However, when considering purchasing a franchise business, you should avoid making unnecessary mistakes and learn from others who have gone down the same path before. When you start looking for small business ideas, business names and advice on how to start a business, compliance costs of setting up a new business, the franchise business model can look really appealing.

Buying a franchise can be a great pathway to running your own business. You could reap the benefits of an established brand with a popular product or service and a great reputation. There’s also access to support with training, advertising and marketing, and operation manuals to streamline the way you run your business. On the other hand, franchising gives you much less control of how, where and for how long you run your business.

Before you buy a franchise, it’s important to seek advice from an experienced franchise lawyer, business adviser or accountant. DC Strategy Lawyers have acted for many franchisees over the years; and set out below is some practical considerations before you commit to a franchise.

1. Learn everything you can about franchising and do your due diligence

You need to learn as much as you can about franchising. There are many online resources for prospective franchisees including training courses on franchising. A good place to start is the Australian Competition & Consumer Commission https://www.accc.gov.au. Due diligence is essential! It is an assessment process of the potential business opportunity. It is a way to verify the financial and other records of the business, its financial viability and to discover all operational, financial or other current and potential problems. The importance of conducting thorough due diligence, with the help of your financial and legal advisers, is often not given the attention it deserves.

2. Underestimating the franchise agreement and the financial commitment

Franchising is regulated by the Franchising Code of Conduct. Before entering a franchising arrangement, you should be given certain documents including your franchise agreement, code of conduct and disclosure statement. This is your opportunity to review the documentation to make an informed decision. The franchise agreement is a contract you agree to for a set period of time, often five years. It covers exactly where and how you will run your franchise. Obtaining professional advice, including legal and financial advice, will ensure that you understand your rights and responsibilities under the agreement.

One of the biggest mistakes a franchise business buyer can make is underestimating how much money they will be investing over the period of their franchise agreement. This is where advice from a reputable accountant is vital. Keep in mind that whatever figure you think will represent your total financial commitment, you should add a minimum of 15/20 percent to it.

There are certain risks to be aware of in franchising that might not apply to other types of business. In particular:

(a) make sure you have extra funds to cover unanticipated costs over the term of your franchise agreement, for example, the franchisor may change their systems or the look/branding of their stores and you will usually be responsible for the cost of these changes;
(b) consumer demands may change in a geographical area;
(c) restrictions imposed on product choice, where you will be required to buy products directly from the franchisor even though cheaper alternatives may exist. It therefore, important to keep in mind that you must never buy a business that you cannot afford, as it is a sure recipe for failure.

Speak with Franchisees
Speaking to current and past franchisee will be invaluable in your decision making and they will be your best source of information

3. Speak with other franchisees

The disclosure document given to you by the franchisor will list all the current franchisees within the business. Get in touch with as many of them as you can to find out about their experiences and any issues, they might have faced with the business model or dealing with the franchisor including, asking them about their geographical territory, overlap in territory or unclear boundaries; the extent of control over local marketing in the territory; any restraint issues during the term and after; and how this may have affected them in the course of running their business. The disclosure document will have a list of past franchisees, it is also worth contacting past franchisees for a more balanced view.

The information you gather by speaking to current and past franchisee will be invaluable in your decision making and they will be your best source of information about the franchisor, their operational requirements and general issues arising on daily basis.

4. Pick a business that aligns with your needs and lifestyle

If you are used to working 9am to 5pm Monday to Friday and having weekends off, then buying a retail franchise store, which must be open for business seven days a week, initially only staffed with family members, yourself included, may not align with your lifestyle and your family’s expectations of your availability. Unlike a stand-alone business, when purchasing a franchise business, you are buying in an established brand and process of operation. Not following that process defeats the purpose of buying a franchise.

If you are not someone who can follow the directions of others, and are unable to adhere to a system, then you may wish to reconsider, as franchising may not be suitable for you. You should discuss any purchase not just with your spouse/partner but also with your children and any other family members expected to be involved in the business. Identifying the right type of franchise business to purchase is paramount to ensure the ongoing success and commitment of your new venture.

5. Have an exit strategy

Any person thinking of purchasing a business, regardless of whether it is a franchise business or a stand-along business, must consider and put in place an exit strategy, a “succession plan”, a plan which deals with what happens in the future and the options of getting out of such business. It may be done by selling the business, closing it or passing it on to a family member. Most franchise agreements deal with future sale of the business, as well as death, incapacity and general termination of the franchise agreement.

Any exit strategy needs to incorporate the requirements of the franchisor. However, in the case of a franchise business, it is important to remember that once the franchise agreement ends, the franchisor has no obligation to renew your franchise, so the business and any goodwill you’ve built could go back to the franchisor. This should be a major consideration of your succession plan.

6. Get your lawyer to review your documents

A franchise agreement is a contract which will bind you for the duration specified. It may also restrict what you are able to do after terminating the agreement through a restraint clause. So, before you sign on the dotted line, do yourself a favour and get the documents reviewed by a franchise lawyer, who can offer advice and guide you in your purchase.