Buying a franchise

Buying a franchise is an exciting prospect. For many people, this is the first step into entrepreneurship, so it is important to get it right. You can set yourself up quite nicely or lose your investment.

Franchising in Australia is governed by the Franchising Code of Conduct, newly updated as of January 1, 2015. However, the rules are not self-executing. Whether you do well or badly may depend, at least in part, on the advice you get while evaluating opportunities. If you are seeking clarity on buying a franchise in Australia, it is important to know what to expect and what to ask of your franchise attorney.

The specialist franchise lawyer at Sydney’s Owen Hodge will do the following four things for you:

1. Thoroughly review the Franchise Agreement and Disclosure Document.

The Franchise Agreement sets out the legal details of your relationship with the franchisor and must be provided to you at least 14 days before signing. Make sure you understand the term length of the franchise, whether you will have exclusive territory rights, and what to expect in terms of training and promotion assistance. What changes may the franchisor make during the term of the agreement, and what are your options for renewing, exiting or transferring the franchise?  Does the Franchise Agreement set out a procedure for resolving disputes?

The Disclosure Document sets out additional financial and legal matters, including:

  • the franchisor’s financial statements,
  • any legal proceedings against the franchisor,
  • contact details for current or former franchisees and
  • anticipated franchise operating costs and fees to be paid by the franchisee.

Your franchise lawyer will go through this for any information that may affect your plans for buying a franchise.

2. Assist with the additional due diligence necessary to help you evaluate the pros and cons of a particular franchise system and proposed territory.

Due diligence should also include a review of other agreements such as equipment leases, commercial property leases, intellectual property, confidentiality and non-compete agreements.

Beyond that, however, what is the franchisor’s reputation with those who have already bought franchises?  Has there been bad press about the franchise or the directors? Are the minimum sales figures set out in the Franchise Agreement realistic within that territory? Does the franchise have an established reputation with customers? Being completely new and unknown may present almost as many difficulties as a mediocre track record.

3. Help you evaluate your financing options and business structure.

Buying a franchise requires a substantial investment, sometimes as much as $1 million. How exactly do you plan to raise the funds? You may have a number of options, but it would be wise to review your plans with your franchise attorney as well as your accountant.

Who will own the franchise?  Do you intend to be a sole proprietor, or will this venture be a formal partnership or company? What are the tax implications of buying a franchise under any of the available business structures? Are your personal assets adequately protected from business exposure? A thorough review of underlying organizational documents may help you understand both the positive financial potential and the risks of buying a franchise.

4. Be available to meet with you and to answer your questions.

This, perhaps, is the most important of all. As required by the Code, your attorney should be completely independent of the franchisor so that you can be confident of unbiased advice. But, as well as being fair and knowledgeable about franchise law, your attorney must actually be available to you.

Do not be reluctant to ask questions and then ask them again is something is unclear. Buying a franchise is a substantial commitment and you should expect to feel that you are making an informed decision. Our Sydney-based franchise lawyers can meet with you in person, as well as being available by phone or email throughout the review period, to discuss the details brought to light by the document review and other due diligence.

At Owen Hodge Lawyers, we have assisted many clients in their evaluation of franchise opportunities. If you are thinking about buying a franchise, call us at 1800 770 780 or send us a message at https://www.owenhodge.com.au/contact/ to schedule a consultation with a franchise lawyer or litigation lawyer Sydney residents can trust. We would be happy to help you make the best possible decision about this important move.