BUYING A FOOD FRANCHISE? What you should know
BUYING A FOOD FRANCHISE? What you should know
The franchise model is popular in the food and beverage industry, with brands such as McDonald’s, Starbucks and Boost Juice demonstrating its success. Although brand name franchises can be enticing, potential franchisees should still thoroughly conduct their due diligence.
Potential franchisees should inspect all equipment, understand their obligations relating to the premises, obtain food based business licences and undertake any relevant training for safely handling food. We unpack each of these points below.
INSPECTING THE BUSINESS’ EQUIPMENT
As with any business, it’s essential to inspect the business’ equipment. This is especially important for a food-based franchise where specialised equipment can cost a significant amount to replace or repair. The last thing you want to discover is that the storage fridge needs a new condenser one week after you become a franchisee!
Before engaging a professional to assess the equipment, speak to the franchisor. Some major franchises provide assistance to the incoming franchisee (i.e. you) by conducting an inspection of the existing franchise and can point out any issues with the equipment. It is usually the existing franchisee’s responsibility to repair or replace the equipment before you come on board.
This is important because once the purchase is finalised, you accept all responsibility for the repairs (and the potentially significant costs associated with upgrades that the franchisor may require). If the franchisor expects to make any improvements, you should ensure that the outgoing franchisee organises this before the sale (or seek a discount on the purchase price based on the value of upgrades the franchisor requires).
It’s not unusual for a franchisor to expect franchisees purchase new equipment to take into account new food offerings. A number of franchise networks have upgraded systems or equipment and required franchisees to spend significant money as a result. Although the franchisor should explain this in the disclosure document as part of the purchase process, it is important to be very clear on the timing of such upgrades to budget for these expenses (or negotiate a lower price).
You will likely operate your franchise from a premises (unless it is a mobile franchise), in which case it is essential that you understand your obligations under the lease. When considering the lease, it is important to think about the following:
Term and Duration of the lease: Ensure that the lease including the option(s) to renew are as long as the term of the franchise agreement.
Rent and outgoings: Assess this against your business plan to ensure you can comfortably pay the rent and outgoings, even if the business isn’t going so well. Also, make sure to project into the future as your rent will increase. If you intend to operate in a shopping centre, there are a number of additional costs that you should confirm with the lessor (or franchisor), such as promotional levies and outgoings.
Refurbishment clause: Most shopping centres require refurbishment to the premises before they will renew a lease. This can easily exceed hundreds of thousands of dollars as you will likely be required to restore the premises to base building standard.
Make good obligations: What will be required for you to reinstate the premises at the end of the lease? Given the huge financial commitment a lease requires, we advise that you seek legal advice on the lease in addition to the franchise agreement.
OBTAIN FOOD BASED LICENSES
Another important clause in the franchise agreement is the requirement to obtain all applicable licenses before you start operating. In the case of a food franchise, this clause refers to the State or Territory and local regulations that govern the right for you to operate a business that serves food. For example, in NSW you will require local council approval to operate, as well as to hold qualifications related to food preparation.
If you fail to obtain the necessary approvals, qualifications and licences, you could be prevented from becoming a franchisee. Also, if you lose your qualifications during the term of the franchise, you will be considered in breach of the franchise agreement, and the franchisor could terminate the relationship.
Before rushing off to secure the relevant qualification and obtaining council approval, first speak with the franchisor. If you are taking over an existing food franchise, then it’s more likely the approval is already in place (although it never hurts to have your lawyer confirm). As to your qualifications in professional franchise systems, the franchisor will provide very clear guidelines regarding what they require in their system. Generally, their standard training processes will cover off the licences and qualifications required (after all, this is one of the benefits of purchasing from an established franchise system). It is important that any licences are transferred to you on purchase. You can confirm this with your legal advisor.
Franchisees should also check that the existing business is compliant with current food safety regulations and have no reputation-damaging fines or adverse findings by the regulators. Most states have a register of penalty notices from food authorities, and if you are buying a business that has recently been publicly named and shamed on the schedule, you could be in for an unpleasant surprise. We recommend checking this register and of course, search online for reviews and any associated news regarding the business before purchase.
Food-based franchises can require extensive and lengthy training of their franchisees (and their employees). McDonald’s are well known for requiring franchisees undertake between 9 and 12 months of job training. Ensure that you clearly understand what you are committing to before commencing the process. You may realise that you don’t have the capacity to undertake six months of training or cannot afford to forfeit any income during this time.
FAMILIARISE YOURSELF WITH THE FRANCHISE AGREEMENT
Irrespective of what type of franchise you purchase, the franchise agreement will be the central document governing the relationship between you and the franchisor. Take the time to clearly understand your obligations under the franchise agreement, for example:
• initial and ongoing fees;
• each party’s obligations under the franchise agreement, including upcoming equipment upgrades, obligations for ongoing training, and obligations to purchase from particular suppliers for particular goods (such as special sauces and food supplies you are required to purchase from the franchisor); and
• exit provisions (both for selling and terminating the franchise agreement).
Buying a food based franchise is an exciting venture. But before you commit to a franchise term, consider the issues unique to the industry and conduct your due diligence. This means checking your equipment, reading through your lease agreement, obtaining any licences and qualifications and assessing whether you have the resources to commit to training. Finally, always remember, if you have any questions - speak with your franchisor and legal advisor.
Masao Watanabe is a franchise lawyer at LegalVision. During his time with the team, Masao has worked closely with a number of high profile franchisors and has assisted them with drafting franchise documents and resolving disputes, as well as advising on a broad range of general commercial matters.
Through this work, Masao has developed an in-depth understanding of franchise law in Australia and a strong appreciation of how to apply it in a commercial context.
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