Buying a Franchise - Top Tips from a Lawyer

The documents involved in buying a franchise can be overwhelming, with hidden costs and traps, so it's crucial that you understand everything you are being required to sign and the implications of becoming a franchisee.

We help people buy and sell franchised businesses all the time (as well as helping people to franchise their businesses) so we know what to look out for and also what to avoid.

Here are some TOP TIPS on buying a franchise and how to avoid the biggest mistakes we see people make time and time again …

Tip #1: Do your due diligence

You should make sure that the franchisor is genuinely interested in helping their franchisees succeed and one of the most import things you can do is to talk to current and former franchisees to understand what their experience inside the franchise system is like. Their details will be provided to you by the franchisor in the disclosure document.

Check out the new Franchise Disclosure Register which gives prospective franchise buyers, current franchisees and professional advisers access to information that is important to know when making business decisions. You can compare similar franchises to see if you are getting a good deal.

Your lawyer should carry out searches on the franchisor and its intellectual property, but you have a role to play in researching and investigating the franchise also. The best way to get to know the franchise business is to thoroughly research the franchise system and study the disclosure document, the franchise agreement and any other documents provided by the franchisor, before you buy.

Tip #2: Ask the right questions

You need to ask the franchisor the right questions before you even get to the legal document stage. Take time to meet with the franchisor and ask key questions like:

• How many hours will I personally be required to work in the business?
• What training and support do I get from the franchisor?
• What is the minimum performance criteria and what are the consequences of not meeting them?
• What other costs are involved (e.g., software licences, marketing fees, transfer fees and renewal fees)?
• What happens if I want to sell the business?

Often, we find that when we report to a franchisee on the documents, this is the first time they have considered some of these important aspects that should have already been discussed.

TIP #3: Set yourself up properly

Chances are, there will be benefits gained from structuring your business as a company so that you can protect your personal property. As a sole trader, you are personally liable for all business debts. However, having a company structure turns your business into a separate legal entity, meaning the company can sue and be sued. This helps limit your personal liability.

Don’t forget that, as well as being liable to the franchisor, you may also be liable to your staff, clients, landlord and suppliers etc. You do not want to carry all this risk and liability personally.

Tip #4: Make sure you fully understand the documents or what it is to be a franchisee

Despite the risks, many franchisees don’t allocate enough time and money at the outset to fully understand the legal documents. It is not until later that they start to question what happens at the end of their franchise agreement by which time it is too late.

Consider, for example:

• Will you be able to renew the agreement if you want to?
• What rules apply if you want to sell the business before the end of the term?

And, perhaps most importantly:

• Are there any restrictions on you working in or starting a similar business after you leave the franchise system? This could stop you being able to earn an income, so it’s crucial that you obtain legal advice on the restraint of trade clauses.

You also need to check that the documents contain all the agreed terms that were discussed (e.g. price and any income guarantees).

Tip #5: Engage experienced franchise experts

Seek professional advice from an independent accountant, lawyer and business advisor, with experience in franchising, to help you spot red flags and assess the viability of the business.

It is particularly important to engage a commercial lawyer, who regularly reviews franchise documents, to properly advise you on the acquisition of the franchised business. This is a specialist area of law and needs someone who knows what is important to consider and how to explain the process and the risks, so you fully understand them.

Of the enquiries we get from franchisees who want to terminate their franchise agreement, at least 90% did not engage a specialist franchise lawyer to advise them on the documents before they signed. They really had no idea what they were getting into!