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Christopher Bruce

- 1 Jun 2015
  • Uncategorised

Thinking of buying a franchise business or establishing a franchise system?

Running your own business is a desirable prospect for lots of people. But there are barriers to starting one up, particularly the associated costs.

That’s why franchises are so popular. They give you access to an existing business model, brand name that people already know and training and support to get the business up and running.

Or if you have built up your own business and brand name from scratch, you may want to consider starting up your own franchise, and using the model to develop the brand and expand the system.

These are big decisions and you will need some legal advice along the way.

If you are thinking about buying a franchise business or starting a franchise system, here are a few questions to ask yourself first.

1. What are the potential benefits of a franchise model?

  • For Franchisors, the primary advantage is access to other people’s funds (capital) and labour to develop the brand, resulting in expansion faster than could otherwise be achieved by natural growth or via lenders/investors.
  • For Franchisees, benefits include initial training and ongoing support, operating under an established and known brand, marketing support and having a network of peers for advice and assistance.

2. Is my business suitable to franchise?

While franchising can be an attractive business model, not every business is suitable to franchise. Some of the questions to ask about the business include:

  • Is there a successful prototype business?
  • Can the business be replicated, including will the model work in different markets?
  • Can I sell franchises? What will attract prospective franchisees?
  • Can my franchisees expect to receive an adequate return from their investment?
  • Do I have the initial funds required – for setting up the business structure, advice, protecting intellectual property and marketing materials?

3. As a prospective franchisee, what can I negotiate in my Franchise Agreement?

The more established franchise systems will generally not agree to any amendments to the base Franchise Agreement. This keeps the system largely the same in respect of the rights and obligations of all franchisees. That being said, the following may be open to negotiation with a Franchisor:

  • A discount to the upfront franchise fee
  • The term of the franchise, particularly if a lease is involved
  • The size of the territory (if there is one)
  • A first option to acquire another territory (if there is one)
  • Conditions for renewal/sale (such as a reduction in the renewal/transfer fee)

4. What are some common issues that arise between Franchisors and Franchisees?

  • Franchising is not immune to problems and conflict that can occur in commercial relationships.
  • For site based franchises, having a mismatch between the Franchise Agreement term and the lease term can cause issues, potentially requiring relocation (normally at the franchisee’s cost).
  • Former franchisees may be restricted from earning a living in the same industry, once exiting the franchise.
  • Good franchise systems will have in-house processes to attempt to resolve issues, with minimum disruption to the system

5. Why should I seek independent advice? 

Having an experienced advisor will assist you to identify provisions that are important, unusual or may be particularly onerous, and to identify what realistically might be able to be negotiated with the Franchisor.