12 questions to ask the franchisor before you buy a franchise
Buying a franchise is a big decision. It’s easy to make a mistake and it is important to get good advice and take time to make appropriate enquiries before a commitment is made. As they say “Buy in haste, repent at leisure”.
We are one of the very few North Sydney franchise lawyer firms whose principal is also accredited by the Law Society of NSW as a business law specialist.
We help potential franchisees make the right decision and choose the right franchise.
- Who is the franchisor?
Ask the franchisor if their business is a franchise. Speak to a local operator and call the Franchise Council of Australia. All reputable franchisors should be members. Although membership of The Franchise Council of Australia is voluntary, it is committed to best practice and encourages franchising conduct of the highest standards. A list of their members also appears on their website. If your franchisor is not a member, ask why not.
- Ask for an Information Statement
These are not for every telephone enquiry, and by law cannot exceed 2 pages in length. But if you are interested in acquiring a franchised business, then the Information Statement is a good starting point and will give you a good introduction to the nature of the business you are interested in.
- Ask for a Disclosure Document
If you are interested in taking your enquiries further, then ask for a Disclosure Statement. These are mandated by the Franchising Code of Conduct, which has the force of law.
Since 1 January 2015, a copy of the Disclosure Document, the Franchising Code of Conduct and the proposed franchise agreement must be given to a prospective franchisee at least 14 days before entry into a franchise agreement or payment of a non-refundable deposit whichever occurs first.
The Disclosure Statement will tell you the royalties which have to be paid, whether the territory is exclusive and how the franchise agreement can end. It also gives a lot of other useful information.
- What will it cost?
There are typically a number of upfront and continuous costs involved in a franchised business. Our North Sydney franchise lawyer can tell you what you need to know to make sure your franchise purchase does not have any surprises.
You will need to know not only about any upfront or ongoing fees (including say, rent under a commercial lease) but also whether you will need to upgrade your equipment from time to time, or pay for ongoing training, or (if you have a store) pay for the refurbishment of your store’s fixtures and fittings.
Costs can also be impacted by whether you are thinking of buying a new franchise or an existing franchise. Where the franchised business has been operating for some time, you may be asked to pay for goodwill, and issues relating to whether the commercial lease is coming up for renewal and depreciation of furniture, fittings and equipment may be relevant. Issues of particular concern relate to turnover rent in the commercial lease or in the franchise agreement, which typically mean that the more money you make the more rent and royalties you pay!
- More on royalties and other fees
Often the franchisor will insist on an up-front fee for use of their “system”, which includes their operating system (as explained in their operations manual) and their know-how and trademarks.
The franchisor usually also requires regular on-going payments (or royalties). These are typically paid for providing marketing, advertising, management, business and technical support.
If a franchise agreement falls short, it is very often in these areas. For example there might be a regular monthly or annual “marketing levy” which is payable, but no obligation on the franchisor to spend it on marketing your franchise. Or else technical support is offered by telephone, but the details of turnaround time or the number of calls which can be made each week or month are not provided in the franchise agreement. Our franchise lawyer in North Sydney can assist you by highlighting for you any such areas where the franchise agreement falls short, and negotiate a workable solution before you sign.
- What about the territory
How big is the territory? Is it exclusive? An old trick still used by some franchisors is to give exclusive territory rights to you but not sole and exclusive territory rights. So if the franchisor forms the opinion that you are not performing well enough (even though you are meeting all your key performance indicators) or if there is a change of management within the franchisor after contracts are signed and the new management simply does not like you, the franchisor itself can open up a shop in your territory or compete online, and under-cut your sales prices and force you out of business.
Relevant to this issue is whether the franchisor insists on restraint of trade provisions. If you are to leave the franchise, do you still want to be in business in the same industry and in the same territory? How will the restraint of trade affect you after you leave?
Other related questions are what your on-line presence will be. Can you use e-Bay or other trading platforms?
- Do you have to borrow any money?
This is a critical issue and it is closely related to whether you have an option to renew the term.
Many franchisees find that the interest on their borrowings is so high that they have to work long hours to make ends meet.
By the end of the first term of the franchise (which is typically 3-5 years) they have built up the business and managed to pay off their loans but they are so exhausted they decide to sell the franchised business, only to find a clause in the franchise agreement saying that they are not entitled to any payment for goodwill, which vests in the franchisor.
So they have worked and sweated throughout the first term, for very little financial gain.
- What profit will you make?
An obvious question. However if you have asked this question three different ways and you are still unclear of the answer, then you actually do have the answer. It is: negotiate with a different franchisor.
You should be looking for indicators of long term growth prospects, not only in turnover but also in net profits. Have your accountant look at the financial statements and discuss them with him or her.
As franchise lawyers in North Sydney, we work closely with our clients’ accountants in relation to franchise matters.
- Is there a cultural fit?
To answer this question, consider issues such as how often the franchisor will visit or communicate with you, and what arrangements are in place by which you can express and communicate feedback to the franchisor on any matter including processes and marketing plans. Will you be fully informed of what the franchisor expects of you and vice versa?
- What support have you been promised?
Details of the initial training and ongoing support should be set out in the Disclosure Document and the franchise agreement. What is it? How will it work? Will the franchisor help you out if the business is not doing well? How? In what circumstances? Will they reduce their fees during any troubling period? For how long? What if you get sick and the business suffers?
- And if the franchisor goes bust?
What are your rights and obligations in such circumstances? Will your obligations to the landlord or your suppliers still continue even if the franchise ceases to exist? Can you continue to use the brand name or will you have to buy it off the liquidator of the franchisor?
These discussions will likely be awkward but they are critical.
- Talk to other franchisees.
The Disclosure Document will include a list of current and past franchisees. Has their return on investment met their expectations? What has been their best experience? What has been their worst?
Leigh Adams Franchise Lawyers North Sydney can answer all your questions about your potential franchise business purchase. We negotiate the documents and take the worry out of the transaction. Call Leigh today on 02 9964 0022 or email him on firstname.lastname@example.org. We get you there.