When buying a franchise, understanding the intricacies and avoiding pitfalls is crucial. With extensive experience in assisting clients with the purchase and sale of franchised businesses, and in franchising businesses themselves, I’ve observed over the years the key areas where potential franchisees stumble. This article is designed to help you navigate these common mistakes.
Mistake #1: Skipping Due Diligence
One of the biggest mistakes prospective franchisees make is failing to conduct thorough due diligence before committing. It’s essential to evaluate the franchisor’s dedication to supporting their network’s success. This includes speaking with both current and former franchisees, as their firsthand experiences offer valuable insight into the franchise’s operations and long-term prospects. These conversations can shed light on the level of support provided by the franchisor, the business model’s effectiveness, and the franchise’s financial stability. Read the disclosure document carefully as his has valuable insights. Tools like the Franchise Disclosure Register can also be extremely useful for comparing options and making an informed decision.
While your lawyer will take care of the legal aspects, your role in researching the franchise’s history, performance, and reputation is equally critical.
Top Tip: Don’t Rush Due Diligence
Take your time to research the franchise. Speak to current and former franchisees and review the Franchise Disclosure Register thoroughly for hidden insights.
Mistake #2: Not Asking Critical Questions Early On
As part of your due diligence, you have to ask the right questions of the franchisor before you make any decisions or promises. Many franchisees come to regret not asking more probing questions before signing any agreements. It’s vital to have a clear understanding of your commitments and expectations by asking questions such as the following:
Details on Performance Criteria:
- What are the specific performance criteria I need to meet as a franchisee?
- Can you explain the consequences or support measures in place if these performance criteria are not met?
Understanding the Support System:
- Could you elaborate on the support and training you provide to franchisees?
- What ongoing resources and assistance will be available to me once the initial training is complete?
Additional Financial Commitments:
- Beyond the initial investment, what additional financial obligations should I expect?
- Are there any recurring fees, such as marketing or technology fees, that I should be aware of?
Terms for Exiting the Franchise:
- What are the terms and conditions if I decide to sell or exit the franchise?
- Are there any fees or specific processes I need to be aware of for transferring or terminating the franchise agreement?
These questions are designed to provide a comprehensive understanding of what it means to be a franchisee, not just financially, but in terms of day-to-day operations, long-term commitments, and potential exit strategies. It’s important for franchisees to get clear and detailed answers to these questions to ensure they have a realistic and complete picture of the franchise opportunity.
Top Tip: Ask the Tough Questions
Before signing anything, ask questions about financial commitments, performance expectations, and support systems. Getting clarity upfront can save you headaches later.
Mistake #3: Ignoring the Importance of Business Structure
Selecting the right business structure for your franchise is more than just a formality — it has a significant impact on your financial and legal liability. Many prospective franchisees underestimate the advantages of a corporate structure, which can help protect personal assets from business-related risks. It’s crucial to understand the legal and financial implications of operating as a sole trader versus establishing a corporate entity. Each option has its benefits and drawbacks, so your choice should align with your long-term goals and your tolerance for risk.
Your lawyer and accountant can provide valuable guidance to ensure you make the best decision for your circumstances.
Mistake #4: Underestimating Legal Documents
The complexity of legal documents in franchising is often underestimated. Key aspects such as the term of the agreement, renewal rights, exit strategies, and non-compete clauses require experienced eyes and careful analysis. Understanding these documents is not just about reading the fine print but also about foreseeing potential future scenarios. How does the agreement protect you if the franchisor changes management or policy? What are your options if the business doesn’t perform as expected? These are critical considerations that need to be thoroughly evaluated with your legal adviser.
Top Tip: Look Beyond the Fine Print
Franchise agreements can be complex. Pay attention to clauses around renewal rights, exit strategies, and non-compete terms. A legal expert can help you avoid surprises.
Mistake #5: Not Seeking Expert Advice
A common and critical error is not seeking advice from specialists in franchising. Professionals such as accountants, lawyers, and business advisors with a focus on franchising bring invaluable expertise. They can article you through financial projections, legal implications, and strategic planning. Their insights can help you identify potential red flags, evaluate the franchise’s financial health, and understand your rights and obligations under the franchise agreement.
Mistake #6: Ignoring Personal Compatibility and Lifestyle Impact
Another oversight is failing to consider how the franchise will fit into your personal life and whether it aligns with your values and lifestyle. Running a franchise can be demanding, and it’s important to assess if the business model suits your personal goals, work-life balance preferences, and long-term aspirations.
Often franchisees are required to nominate a manager (the ‘Nominated Manager’) and this person is required to dedicate their whole time and attention to running the franchise. This is something that needs to be considered carefully especially if you were simply buying as an investment and not a job.
In conclusion, buying a franchise is a significant decision that requires careful consideration and planning. Avoiding these common mistakes can pave the way for a successful and fulfilling business venture. As a commercial lawyer, I advocate the importance of being well-informed and prepared for the complexities of franchising, ensuring a smoother journey towards achieving your entrepreneurial goals.
Helen Kay is a dynamic and highly accomplished commercial lawyer with over 25 years of expertise shaping the future of businesses. As the founder of Rise Legal, Helen specialises in delivering innovative and practical commercial and franchise legal solutions that empower businesses to thrive. Her career is a testament to her passion and drive, having held influential roles at top-tier law firms where she consistently delivered exceptional results. With her unique blend of hands-on experience and forward-thinking leadership, Helen is a trusted partner for franchisors and franchisees, helping them protect and grow their businesses with confidence through tailored, comprehensive legal support.
Rise Legal Gold Coast | Perth | Sydney
T: 1300 064 707 | E: info@riselegal.com.au | https://riselegal.com.au
Disclaimer: This article is intended for informational purposes only and should not be considered legal advice. Consult with a qualified commercial lawyer for personalised advice related to your specific circumstances.
Individual liability limited by a scheme approved under Professional Standards Legislation.