Buying a franchise business – what do you need to look out for?
Are you considering buying a franchise but don’t know where to start? Have you heard horror stories from your friends and family about buying a franchise? Do you want to give it a go? Buying the right type of franchise is a great way to get into business as you are buying a system and a way of doing business that is usually tried and tested. However as with any investment, before you enter a franchise there are many considerations that you have to go through. This article looks at the different considerations that you need to have before you enter a franchise.
What are you buying?
When you buy a franchise and become a franchisee you should be buying a proven system for running a successful business. The franchise system is the most important aspect of the transaction and the aspect that many franchisors and franchisees get wrong. A franchise system is really the intellectual property behind the business. This includes the name of the franchise, its systems and process for operating its business and any other aspect of the business’ intellectual property.
A good franchise system will have a comprehensive manual that details all aspects of the franchise business including everything that needs to be done in the franchise on a daily basis. An excellent franchise system will back that up with comprehensive training for you and your staff. It will also have its intellectual property, such as its trademarks and if it has any unique systems, registered so that they are protected and you can operate the business with confidence. I have seen many franchisees fail because they bought into a franchise system that was not set up properly resulting in the franchisee being unable to operate the business.
The history of the franchise
Before you enter a franchise you are provided with a disclosure statement that details the history of the franchise and franchisor. The information that is disclosed in these disclosure statements is information that is mandatory and the franchisor must disclose. You should also do an quick online search of the name of the franchise, the people behind the franchise and the franchisees to see if other problems exist. For instance there are many review websites, if you can see that a number of different franchisees are having issues with their customers then it is probably a failure of the franchise system more than the individual running the franchise.
The biggest aspect that is missed however is the ability of you as a prospective franchisee to actually contact the existing franchisees and discuss the franchise system with them. The franchising code of conduct requires the franchisor to disclose the name and contact details of all the existing franchisees. Call them and discuss the system, any concerns that you might have or potential issues that you foresee. You don’t know what you don’t know, ask them lots of questions. They will usually be in a great position to give you advice about the franchise system so that you can judge if it is right for you.
A major aspect of any business is understanding what your structure is, what your agreements are and generally understanding your business. While it is a requirement of the franchising code of conduct that you obtain legal and financial advice before you enter into a franchise do not rely on this solely. Read the documentation that you are provided, if you are not sure of an aspect ask questions. The franchisor should be able to answer most of your questions about the documentation.
You should never rely solely on the advice of your lawyer or accountant. It is not an excuse to say that your advisors did not explain something to you. You are the business owner, you need to understand what is happening in your business so you need to make sure that you understand what the documentation is and what it says.
What else is there to consider?
Even when you are buying into an existing franchise system you need to consider all aspects that are required for a startup business. Such as:
- The structure that you will operate the business through;
- If you need premises to operate your business, what is the lease arrangements;
- What licenses you need to operate the business (i.e. liquor, food licences etc); and
- What insurance you need to have in place for your business.
Jeremy Streten is a lawyer and the author of the amazon best seller “The Business Legal Lifecycle” (www.businesslegallifecycle.com), which is designed to help business owners understand what they are doing in their business from a legal perspective and give them a plan for the future.