10 Questions to Ask Before Buying a Franchised Business

When buying a franchise you can often think it’s less risky than buying a business that is outside a franchise group. That may be true, but no matter how profitable it all appears, there are issues you need to consider.

Below are 10 questions that a prospective franchisee should ask before buying a franchised business.

1. Where do I start?

Start by getting the with resources you need to make an informed decision. There are some freely available resources about franchising that are essential reading:

2. What documents do I need?

Before you go ahead and sign any documents, you must get all the necessary documents in order to enable you to make an informed decision.

You must get the current franchise agreement and the disclosure document from the Franchisor. Additionally there is the Franchising Code of Conduct that requires the franchisor give you the information sheet as well as a copy of the code.

The vendor of the business or the agent who is selling the business will provide you with a contract of sale for the business along with any lease documentation for any premises. In Australia there are rules regarding the financial information that must be shared with the prospective buyer of a small business. In Victoria, this applies to all businesses sold for $350,000 or less. Even if your purchase price exceeds this threshold, you should ask to see financial statements for the last three years for the business.

Now that you have the documents, read them!!

“It is imperative that you understand the grounds upon which a franchise agreement can be terminated by a franchisor and ensure they comply with the code.”

3. What other research should I do?

Some other research you can do includes:

  • the franchisor’s reputation
  • any existing relationships between franchisees and franchisor
  • any expansion plans the franchisor may have, including opening up franchisee sites near you
  • any current or threat of legal proceedings against the franchisor

4. What should I ask other franchisees?

It can be very helpful to ask other franchisees things like:

  • what the actual costs of the business are compared to what the franchisor has presented;
  • what the level of support provided by the franchisor is, against which the franchisor has presented
  • whether the franchisor is accessible, organised, responsive to queries as well as suggestions.

5. I am getting calls from the agent, should I sign the contract of sale?

If you’re buying an existing business then there is a contract of sale you must sign. Occasionally pressure will be applied for a quick sale. However it’s important that you understand the implications of what signing that contract means to you.

6. I tried reading the documents, but I can’t understand them. What should I ask my lawyer and accountant?

Getting the advice of a lawyer and accountant is vital before making a decision to purchase a business. It’s required by the code that franchisors obtain from prospective franchisees a statement of the advice they’ve received from a lawyer, accountant and or business adviser. In some cases a franchisee may say they were advised to do so but chose not too, and the franchisor still needs to record this.

The points following in this article list the questions  you should ask your lawyer and/or accountant.

7. What are the most important parts of the franchise agreement?

The franchise agreement is the most important document in the suite of documents as it will govern the legal relationship between the franchisor and the prospective franchisee for the term  of the franchise. The obligations of both the franchisee and the franchisor should be read carefully. The following types of clauses can have onerous implication for the franchisee:

Payments under the Franchise Agreement, operating costs and unforeseen capital expenditure

This is the fee schedule of the agreement.

Term and Renewal

The length of time the agreement is for and what your renewal options are.

Territory

The geographic or logical area that restricts your trade.

Minimum Performance Criteria

Any implications you might have if you do not meet performance criteria.

Termination

The terms under which the agreement can be terminated.

Restraints

Any restrictions placed on you during and after the agreement is valid.

Unilateral Changes

The details on how the agreement can be changed.

Unfair Terms

The unfair terms legislation which came into effect on 12 November 2016 has given franchisees some leverage to negotiate with franchisors about terms in franchise agreements that may be unfair.

8. What about employees?

When you’re buying a franchise you need to be aware that employment of staff has different issues associated with it as a franchisee.

For example, the Fair Work Act 2009 (Cth) not only sets minimum terms and conditions of employment for employees, but also may impose onerous notification requirements upon purchasers, transferees or assignees of businesses. Breaches of these provisions in the Fair Work Act 2009 (Cth) may result in severe penalties.

If you are purchasing an existing business, you may be taking on existing vendors employees and contracts, so be very clear on what entitlements are outstanding and the periods of long service leave that you may be agreeing to purchase,

9. What is the best location for the business?

If you are operating out of one fixed location, due diligence on the location is important.

Knowing what the lease terms are and any restrictions on that is vital. If the franchisor is the one who holds the master lease and licenses it to you, you may also need to read the license agreement.

Additionally you may want to consider whether the location is infact a good one for the product and service that you are delivering. This may not be initially obvious but market research will show you whether the product works in that area or not.

10. What is the best business structure?

The business structure that you need for your franchise is entirely dependent on your own circumstances. It’s important to make that decision carefully as things can change into the future. Possible structures can include: sole trader; company; partnership; trust; or a combination of a company and a trust structure. The prospective franchisee should bear in mind that each structure has different costs to setup and maintain as well as different implications on exit.

There are many things to consider before signing an agreement to purchase a business. In order to make an informed decision, it is critical to read all the documents and undertake extensive research, ask questions of the franchisor and other franchisees and seek the advice of an experienced franchising lawyer and accountant.

If you’re looking for the perfect franchise business for you and your family, look no further than JAN-PRO.