While buying a franchise can be a quick way to establish yourself in a small business, there are certain issues which tend to surface in franchise arrangements.
Prospective purchasers should be particularly wary of the following matters:
- Financial Commitment – while certain fees will be obvious (e.g. the upfront franchise fee), it is often the ongoing obligations that bring franchisees unstuck. Costs such as royalties, marketing levies, equipment fees, stock, rent and refurbishment obligations can present a significant issue for cash flow, particularly for new franchise owners. An accountant experienced with small business operations is often invaluable.
- The Term – by purchasing a franchise business, you are purchasing a licence to use the franchisor’s system for a limited period. Franchisees need to plan for what happens when the franchise agreement expires, particularly after any renewal rights have been exhausted.
- Shopping Centres – retail franchisees can find their lease terms with shopping centres becoming difficult to meet over time. Rent reviews, refit obligations, new lease negotiations and even relocation can cause major issues for a franchisee’s viability.
- Performance of Franchisees – the Disclosure Document will normally contain contact details for other franchisees including ex-franchisees for the last 3 years. This gives you an opportunity to confirm what you are being told by the franchisor, and to discover any issues you might not have known.
- Franchisor Control – franchise agreements impose varying levels of control including the use of certain products, suppliers, advertising mediums and content. A good question to ask is if the franchise allows room for innovation, which may better suit the local market.
- Exit Strategy – it is possible that you may wish to leave the system prior to the expiry of the franchise term. What are the conditions for selling the franchise business and what happens if a buyer cannot be found? Does the franchise agreement give you the ability to terminate and, if so, what are the conditions? Are you likely to be restrained from working in any way after the franchise has come to an end?
- Personal Guarantees – the majority of franchise agreements contain guarantee obligations, which make the guarantor(s) personally liable for the franchisee’s obligations. While franchisors will typically be unwilling to remove guarantor provisions, some may agree to cap liability or limit the guarantee to a specific person.
If you have any questions about purchasing a franchise business, or any other queries about franchising, we welcome you to contact Duncan Basheer Hannon via our online form, or free call 1800 324 324.