Buying a Franchise

In Australia, there are around 1000 franchises, with more than 60,000 franchisees operating and every business is different. This uniqueness means that you will normally need the assistance of a franchise lawyer or solicitor, an accountant and possibly a broker or business adviser to assist you in understanding some of your risks. Buying a franchise is like buying any business, you will need to do a lot of research, due diligence and have a good team of advisors to provide you with information to enable you to make the decision – should I buy this franchise?

What is Franchising – The Pros and Cons

Franchising is like a marriage or ongoing relationship between two parties involving the right to products, services, trademarks and business concepts. Franchising is a form of licence by which the owner (Franchisor) of a product or service obtains distribution through affiliated dealers (Franchisees) and the holder of this right usually is given exclusive access over a defined geographical area. Franchising is not a product but rather a method of marketing goods and services. As with any business, there are pros and cons, which include:

Advantages:

• Name recognition / branding
• Standardisation (customers see the same across all franchises – design, products and services)
• History/Track record
• Continuing assistance
• Supplier relationships (often discounts)
• Independence (own boss)
• Proven concept that is working
• Systems to support small business

Disadvantages

• Risks (not all franchisors have a proven track record and there are good and bad locations within the franchise network)
• Changing Trends
• Competition – easy to compete at lower costs
• Not flexible to sell other products
• Paying royalties
• What are you buying
• Forced to buy through “approved suppliers”, which can be more expensive

How do I research and What Profits Can I Expect

It is essential that before your purchase a franchise business from a franchisor you do your homework.

What you can do?

There is a raft of information on franchise businesses in the public arena. You can attend trade shows, review websites, watch existing businesses and most importantly talk to franchises already in the system. Read the Disclosure Document and call franchises who are no longer in the system. Find out why they left, problems with the franchisor, find out what assistance the franchisor provides, how many hours did they work, to name just a few questions. Meet with the franchisor. These meetings are important for you to take notes. If representations are made around profits, confirm them back to the franchisor after the meeting and see their response. This will assist in them not providing you with sales talk. It is important to document any promises, charges and additional support, to ensure that everyone is on the same page before you sign anything.

What your advisors can do?

A franchise lawyer will need to review all the Documents – usually in the form of a Disclosure Document, Franchise Agreement, Licence or Lease and Sale of Business.

These documents will need to be compared against the Franchising Code, to ensure that complete disclosure is provided. If you are buying an existing business, you may want to restrain the current franchisee from competing in a similar business in your area (this will be on top of any agreements between the franchisor and current franchisee).

It is important to use a franchise lawyer or solicitor that practices regularly in the franchise law area, as it critical that your franchise lawyer negotiates on your behalf and ensures that the documents comply against the Franchise Code. It is a specialist area and the law is always changing and evolving, particularly around disclosure.

Often franchisors or brokers offer a law firm as a recommendation. We suggest that to gain true independence, an “affiliated” law firm with the franchisor may not always have your interest at heart as ultimately the referral has come from the franchisor . You will need to use an accountant to review the Profit and Loss Statements and carry out a due diligence program on your behalf. The types of things you will need to understand is how do you get customers, who are your top 10 customers, review tax returns, how many hours do you need to work, how much administration is involved, what are the true profits of the business and so on. You may also need advice on the appropriate business structure and may need to set up companies, trusts, licences and so on. Finally, a business advisor can assist provide you with information around key risks and help you develop a business plan to grow the business . A business plan should include, at the very least:

• Definition and Scope of the Business;
• Charter (goals and objectives)
• Market research;
• Marketing Plan;
• Financial Plan (1, 3 and 5 year projections – including assumptions, best case / worst case scenarios
• SWOT Analysis (Strengths, Weaknesses, Opportunities and Threats)
• Legal Plan – review and analysis of documents
• Insurance Plan
• Staffing Plan
• Action Plan

If you are seeking funding, your bank or financial institution will require a comprehensive business plan as part of your application. Franchising Agreements – Do I need a Franchising Lawyer? Every franchise agreement is different and have been drafted by the Franchisor, usually to protect the Franchisor in the event that the relationship between the Franchisee and Franchisor breaks down in some shape or form. There is a raft of documents that the Franchisor will require you to enter into, including:

• Disclosure Document
• Franchise Agreement
• Restraint of Trade Deed
• Lease or Licence
• Sale of Business

These documents need to be explained in detail and should conform with the Trade Practices (Industry Codes Franchising) Regulation 1998 (“the Franchising Code”). Ordinarily, a franchising lawyer or solicitor will negotiate changes on the franchisee’s behalf.

In some cases, you may need to be represented by a lawyer or solicitors if a breach notice and/or termination notice is issued.

The Franchising Code

There is Commonwealth Legislation - Trade Practices (Industry Codes Franchising) Regulation 1998 (“the Franchising Code”) which is designed to ensure that Franchisees have minimum rights, including:

1. What information must be contained in a Disclosure Document;

2. What steps a Franchisor must do before entering into a Franchise Agreement, including cooling off rights and disclosing material facts;

3. Process for dispute Resolution, and

4. Termination

The regulatory body for ensuring compliance is the Australian Competition and Consumer Commission (ACCC).

Read more about Franchising:

1. What is Franchising? The Pros and Cons
2. Doing Your Homework
3. Why do you need a Lawyer?
4. Franchising Agreements & The Code
5. Breaches, Termination and Disputes

Contact us to arrange a consultation with one of our experienced lawyers.