Securing your Investment! Tips & Traps when Buying a Franchise
Assessing your own compliance
In simple terms, buying a franchise is buying access to a franchisor’s intellectual property for a designated term: their trade mark, operational systems and procedures, branding, products, services, supply, training and support. Your willingness and ability to comply fully with every aspect of the franchise business will be fundamental to your success. You should have a good understanding of your responsibilities to the franchisor regarding financial reporting, attending conferences or meetings, and achieving the minimum performance criteria. These important details are outlined in the franchise agreement and the operations manual.
The Franchise Documentation pack
The franchise agreement will be accompanied by several other documents described below. You and your business partners need to read every line in every document. Don’t worry if you don’t understand any particular point – get a highlighter and make notes of all these and anything you don’t agree with and ask your accountant and lawyer. This will ensure that you make the best use of your advisors’ time.
The Disclosure Document – Existing and Former Franchisees
The Disclosure Document (DD) has a list of current and previous franchisees, as well as their contact details. Contact at least three current franchisees and a couple who have left the network. Asking them questions about training, profitability, franchisor support and anything else you want to know will help you understand how they achieved their success and what, if any, challenges they faced.
Experience of directors
The DD outlines the experience of the directors and officers of the franchise. Broadly speaking operators with extensive management skills and experience in business, should be more likely to run a tight operation with good systems than one whose operators have less skills, qualifications or experience. But you need to exercise your judgement as every entrepreneur and every business starts out small and sometimes even well-established networks can experience difficulties and fail, even after many profitable years trading.
Intellectual Property and Trade Marks
Make sure that the franchisor has registered trade marks. These are usually included in the disclosure document. If the trade marks have only been applied for but are not yet registered, it may indicate third parties are using similar trade marks. If this is the case, check with your lawyer, as you need to ensure the franchise you are considering has exclusive ownership of the trade marks as these are the foundation of growing the brand and the value of your respective investments.
Franchising Code of Conduct
You will also receive a copy of the Franchising Code of Conduct (generally called the ‘Code’). This outlines all of the measures, guidelines and procedures the Australian Competition and Consumer Commission (ACCC) has provided that govern the way in which franchisors and franchisees conduct their business and relate to each other. Read this document thoroughly, as understanding your obligations and the processes and resources available to you in the hopefully unlikely event of a dispute with the franchisor, is important upfront.
When buying an existing business, you will need to either negotiate a new lease or ensure that there is an option for a further term or extension. Ideally the term of the lease should line up with the term of the franchise agreement, which in retail or fast food will be around five years. Similarly, if the franchise is an existing mobile business with a vehicle lease – check the terms of the vehicle lease for renewal options. Also, contact the landlord and confirm if there are any plans for redevelopment that will impact your business for the duration of the lease. And if you do proceed with a lease in a centre where redevelopment is scheduled, have your lawyer negotiate adequate compensation and make the franchisor party to that outcome.
A Head Lease and a Licence to Occupy
In many cases such as large shopping malls, the landlord often does not lease directly to a franchisee. Instead the franchisor takes the head lease and grants what is called a Licence to Occupy or Occupancy Agreement to the franchisee. This is like a sub-lease where you will be responsible for the bond or bank guarantee and pay the rent directly to the lessor. Take professional advice to ensure that you understand your rights and obligations.
A Lease and a Step-in Deed
In some cases, the lessor grants the franchisee a lease, but an additional deed accompanies the lease. It covers the event where the franchisee abandons the business or is lawfully terminated from their franchise agreement. The deed permits the lessor to grant the franchisor the right to take over or ‘step in’ to operate the business. Again, ask your lawyer to ensure you understand your rights and obligations.
Understanding and Managing Risk
Ultimately this process of research or due diligence as it’s called, is all about reducing the risk of going into business.
So, at the end of doing everything you can on your own, speak to a lawyer and an accountant/business advisor who specialise in franchising. This is your best insurance against future disputes, business failure and personal loss. lt can assist you with your negotiation of the Franchise Agreement and in the end, give you the peace of mind that you’re making the best-informed decision to buy a franchise.
Researching and buying a franchise is a complex process but getting it right can be so rewarding as tens of thousands of successful franchise small business owners in Australia can attest.
Naeem Hashemi is a commercial and franchise lawyer with extensive experience including corporate and inhouse counsel roles in diverse industries from large franchise networks, media, leasing, property, retail and FMCG to technology, engineering and not-for-profits.
A Director of DCS Lawyers, he heads up the legal team advising and supporting franchisors with all aspects of their commercial development including leasing, intellectual property protection, corporate structuring, dispute resolution, media and employment law and international master development for Australian companies and foreign networks entering Australia.
For over 30 years DC Strategy has been the region’s only end-to-end franchise consulting, law, recruitment, brand, marketing and technology firm. Their experienced multi-disciplinary teams have built over $2 billion in enterprise value for clients in the last decade alone, developing and supporting many of the most successful national franchise brands here and internationally. DCS manage the franchise commercial, legal and recruitment needs of a large number of networks providing specialist services including trademark, employment, migration, mediation and international recruitment assistance.