What you need to know about buying a franchise
It sounds ideal – a solid business opportunity where you still get to be your own boss. If you are considering buying a franchise you need to make sure that you are buying into a solid business opportunity and not a scam.
Before you sign on the dotted line be aware of the following issues when you are considering buying a franchise:
- Franchises are regulated by the Franchise Code of Conduct which is a statutory instrument.
- Under the Code of Conduct the franchisor is obliged to give you a Disclosure Document, a copy of the Code of Conduct and a copy of the proposed Franchise Agreement fourteen days before you sign the Franchise Agreement.
- The purpose of the Disclosure Document is to give you information about the franchisor to help you make a reasonably informed decision about purchasing the franchise.
The Disclosure Document is required to include information about the franchisor such as:
- The business experience of the franchisor in the last ten years.
- Whether there are any current criminal or civil court proceedings against the franchisor.
- Whether the franchisor or a director of the franchisor has been convicted of a serious offence or been insolvent or bankrupt.
- Details of existing franchisees and where they operate.
- Details of any intellectual property used in the franchise system including patents, trade marks, designs or copyright.
- The territory the franchise is limited to and the site to be occupied by the franchise business.
- What payments you are required to make before entering the franchise agreement and any establishment costs you will have to pay to the franchisor.
- Your rights in relation to terminating the franchise agreement or selling your franchise to another franchisee.
- A financial statement and financial reports of the franchisor.
If you are satisfied with the financial and other aspects of the franchise then you will be required to sign a Franchise Agreement setting out the terms and conditions in relation to the operation of your franchise. This Agreement is a legal contract between you and the franchisor.
The main thing to remember when buying a franchise is that you are purchasing a business and you need to perform the same due diligence and investigations that you would when buying a new business. This due diligence includes getting expert advice from the following professionals:
- Financial and accounting advice on the financial status of the franchise as well as your financial capacity to purchase the franchise.
- Legal advice on the Disclosure Deed and the Franchise Agreement to ensure compliance with the Code of Conduct and that the franchise you are buying is a solid business opportunity. The Disclosure Document and the Franchise Agreement can be complex legal documents which is why it is in your best interests to obtain legal advice before entering into the Franchise Agreement.