Whether you are buying a franchise or a non-franchise business great care should be taken. Any business purchase will usually involve substantial capital and if you are borrowing from a bank then security, usually in the form of a mortgage over your house, will be required.
If you are buying a franchise in New Zealand you must check whether the franchisor is a member of the Franchise Association of New Zealand (FANZ) for, if so, the franchisor will have to comply with the code of practice and code of ethics of the FANZ. The code of practice requires a franchisor to supply a disclosure document to a prospective franchisee and the franchise agreement must contain a dispute resolution provision and a seven day cooling off provision.
Before purchasing a business, you should complete your due diligence which basically means asking the right questions of the vendor or franchisor, receiving and perusing relevant information, going to your own independent accountant and lawyer and ascertaining all material facts.
In completing your due diligence, you should consider all of the following:
- Engage an accountant to examine the books and records of the business.
- Test the financial representations made by the vendor.
- Check whether the business will be able to service your proposed borrowings and still leave an adequate return.
- Check the terms and conditions of the contract and discuss them with your solicitor before you sign it. Is there to be a restraint of trade on the vendor? If the vendor is a company, are the directors personally bound?
- Check the registrations, licences or permits held by the vendor.
- Is the business a franchise? Check the franchise agreement and what fees are payable and what consents are needed.
- Check the provisions of the lease and obtain legal advice before you sign it. What consents are needed from the lessor? Is a personal guarantee required?
- Check the inventory of chattels, plant and equipment and their condition. Are there any encumbrances to be discharged?
- Check for restrictions as to the use of the business premises.
- Check the rates, insurance and other outgoings.
- If employees are to remain in employment, check employment contracts, the method of adjusting salary, annual leave, superannuation, and how this is dealt with in the agreement.
- Seek legal and accounting advice about choosing the most appropriate operating structure as there may be taxation implications.
- Seek legal advice on the laws relating to consumer protection, credit, leases, employment law, patents and copyright.
- Seek expert taxation advice and be aware of GST, PAYE (Pay As You Earn) and FBT (Fringe Benefit Tax).
You can rely upon what a franchisor says or writes as being truthful and the Fair Trading Act 1986 provides remedies for misrepresentations. Most franchise agreements will contain a disclaimer clause which purports to say that a franchisee has not relied upon any statement, representation, inducement, offer or warranty made by or on behalf of a franchisor.
Some franchise agreements contain a separate disclaimer under which the franchisee, and if the franchisee is a company then the directors of that company, specifically acknowledge that any representations made by the franchisor will not be binding upon the franchisor. From a legal point of view this would not usually save a franchisor from litigation using the Fair Trading Act if any false or misleading representations were made.
Please note that in addition, the Fair Trading Amendment Act 2021 which came into force on 16 August 2022 affects standard form small trade contracts and it is geared to prohibit unfair contract terms in consumer contracts like a franchise agreement. Further, New Zealand now has unconscionable conduct in trade provisions which have been in force in Australia for many years.
In my opinion, prospective purchasers are vulnerable even when they obtain independent legal advice and sign disclaimers. Therefore, it is even more important to undertake robust due diligence, to ask the right questions of the vendor or franchisor, and to seek full explanations making written file notes of every conversation or meeting.
Your due diligence should include background checks on the directors of the vendor or franchisor including whether the directors have been made bankrupt or been convicted of any criminal charges.
The purchase of any business contains risks but purchasers should strive to minimise those risks at all times.
Stewart Germann founded Stewart Germann Law Office (SGL) in 1993 as a boutique law firm at Auckland, New Zealand, specialising in franchising, licensing and business law. Stewart has over 40 years’ experience in franchising law and acts for franchisors in New Zealand, Australia, USA and the UK. SGL also act for franchisees and provides legal advice. Stewart has spoken at franchising conferences in New Zealand, Australia, Italy, South Korea and USA and he was on the Board of the Supplier Forum of the International Franchise Association (“IFA”) for 6 years until March 2007. Email: stewart@germann.co.nz | Web: www.germann.co.nz