Top things to consider before entering into a franchise agreement
Buying a franchise of a successful business can be an exciting and lucrative option for making a living.
However, it is important to do your research before investing in any franchise as franchise agreements can be long and involved; with many small details that can have a significant effect on your success and your future.
Here’s what you should consider before taking the next step.
Do your research
Initially it is important to do your research – and then do more research. You will want to investigate the following areas;
1. Learn about the success rate of the franchise you are considering
2. Investigate other businesses that may be similar, or the same, as the franchise you are considering purchasing
3. Understand the market for your franchise and the potential for a steady stream of business from local or online consumers
4. Talk to other franchisees both within the franchise you are considering and others that are different from the one you are wanting to purchase
Familiarise yourself with the franchise agreement
Next you need to become familiar with the franchise agreement. These agreements tend to be significant in length and include many requirements and restrictions pertaining to how you will be expected to run the business, the length of your ownership, and the consequences of terminating your franchise agreement early.
It is imperative that you understand the cost of your initial investment and determine if your profitability will make the investment lucrative. You must also consider what ongoing business costs you will have that are
not included in the initial purchase price. These costs will also need to be taken into consideration when you are determining what your projected profits might be.
Investigate the scope and extent of the sales territory that your franchise will draw business from. Also, be sure to have a full understanding of the limitations, if any, of your on-line/internet selling territory.
Review and understand the terms of the lease on the commercial property that your franchise will occupy. It is important for you to know if you will hold the lease or if the parent company will hold the lease.
Clarify your understanding of the length of the franchise contract by determining the exact term of years for the ownership, the renewal fees, and the consequences of early termination of the contract.
Determine if there is any restraint of trade you might be facing should you decide to terminate the agreement early or one which automatically applies at the natural ending of the agreement.
Check the agreement for options to transfer the balance of the franchise agreement to a new owner in the event that you are not happy with owning the business.
Make sure you have a full understanding of any franchise wide costs that you will be expected to contribute to such as advertising and/or social media expenses.
Because entering into a franchise agreement is complex and costly, it is very important that you are fully familiar with all of the aspects of the business you are investing in, both financially and contractually. In order to make a wise decision, it is best to do a significant amount of research including talking to other franchisees, consulting with financial professionals and meeting with legal experts so that you have a complete picture of the practical aspects of running the business, the financial gains and possible liabilities, and the legal requirements of the franchisor and yourself as the franchisee.
Rolf is Managing Partner of Owen Hodge Lawyers. He has been in the legal practice since 1986 and a partner of Owen Hodge Lawyers since 1992. Rolf focuses on assisting clients to proactively manage
legal responsibilities and opportunities to achieve competitive advantage. Rolf concentrates on business planning and formation, directors’ duties, corporate governance, fund raising and business succession. His major interest is to assist business owners and their financial advisers plan and implement strategies to build and exit from successful businesses.