The decision to buy into a franchise network is a major investment decision for many who are wanting to own their business and take ownership and control of their lives.
One of the main priorities of any prospective franchisee who has found a franchise brand/network they are interested in, is to make sure that the franchise is what it says it is.
You need to analyse your needs, capabilities and limitations in relation to the franchise business. It is your job to make sure that what you are being told is in fact real and genuine and the information begin provided is information that is useful to make an informed decision.
You will likely receive all sorts of impressive and glossy franchise marketing information and promises when you are speaking with a franchisor or their representative about investing in their franchise. You need to look beyond the franchisor's marketing campaign and maintain a clarity of mind and not make impulsive decisions.
Before you buy a franchise, it is important to seek legal advice from an experienced franchise lawyer. At Manookian Solicitors, we are experienced franchise lawyers who will guide and direct you in the right path to ensure you make the right decision. We will engage with your business advisors or accountant during this process.
The starting point for any prospective buyer is to do your “research/due diligence” on the franchise system and get a clear understanding of how the franchise system works. It is an assessment process of the potential business opportunity. It is a way to verify the financial and other records of the business, its financial viability and to discover all operational, financial or other current and potential problems. The importance of conducting thorough due diligence, with the help of your legal and financial advisors is paramount, and is often not given the attention it deserves.
Set out below is a checklist of some practical considerations for any franchisee looking at buying a franchise.
Can you afford to buy the franchise?
Set yourself a budget, as the level of investment varies greatly for different types of franchises. It is important to find out what the total start-up will be, not just the franchise fee. You need to assess and clearly understand how much you can afford to invest and how much you are prepared to borrow from a bank or family members and to factor in a reasonable amount of working capital. Franchise funding by banks is difficult to obtain, therefore you need to start the process early and determine your borrowing capacity. You may need to consider alternative sources of funding and whether such funding is sustainable in the medium and long term.
One of the biggest mistakes a franchise business buyer can make is underestimating how much money they will be investing over the period of their franchise agreement. Keep in mind that whatever figure you think will represent your total financial commitment, you should add a minimum of 15/20 percent to it.
It is therefore, important to keep in mind that you must never buy a business that you cannot afford!
Speak with existing and past franchisees
You should put together an independent list of existing and past franchisees and not simply rely on a few contacts that the franchisor has hand-picked to provide to you. The contacts provided by the franchisor may not provide you with a good representation of franchisees in the network.
It is important to speak to both successful and any less successful franchisees to get a better understanding of the franchise network, access to support with advertising and marketing and the operations manual.
Try to get an understanding of the financial risks especially in relation to factors outside of your control, namely competition and local/territory factors affecting the specific franchisee and how the franchisor has addressed these factors. Existing franchisees can tell you what the franchisor’s support is like; if the turnover/profit projections are realistic; and may offer valuable first-hand experience of the operational aspects of the business and allows you to corroborate with what you are being told by the franchisor is actually reflected in the individual franchisee’s experiences.
To get a balanced understanding of the operation of the franchise business, we suggest that you contact past franchisees to determine the circumstances as to why they left the franchise network. This may provide information as to any conflict with the franchisor or identify franchisor operational issues, among any other valuable information you are able to ascertain from them. This information will be invaluable in your decision-making process.
Understand the franchise
Make sure you understand the business model and operations and what you will be doing on a daily basis, as well as the lifestyle it will give you. For example, is the franchise a mobile business, home based franchise or a bricks and mortar business and is this type of business suitable with your lifestyle. If you are used to working 9-5, 5 days a week, then will a retail franchise operating 7 days a week and long hours work with you and your family’s lifestyle.
Franchising gives you much less control of how and when and for how long you run your business. Consider whether you can follow orders and directions from the franchisor. You may choose a franchise that you are experienced in, or one that you are passionate about.
Part and parcel of this process is to consider the franchisor’s recruitment or selection process of prospective franchisees. Is the process stringent or can anyone join the network? The more stringent the selection process, it is a good indication that the franchisor is selective and wants to protect its network and brand and ensure that only those franchisees that have the capability and the business skills and the financial security to be able to join the network to ensure the maintenance and sustainability of the franchise network, the brand and reputation in the marketplace.
Training requirements
Consider the training provided by the franchisor, both initially to get you up and running and on an ongoing basis to help your business grow. Is the training sufficient for you to be able to gain the skills required to operate the business successfully? You need to get an understanding and get details of the training costs and details of ongoing training costs; where is the training to take place, is it local, interstate or overseas? And who is liable for travel costs and any ongoing travel costs to undertake such training. You need to consider and budget for these costs and expenses and allow for additional working capital.
Consider ongoing fees
A royalty fee will be collected by the franchisor as a percentage of monthly turnover, or through the supply of the raw materials that you need to operate, depending the franchise system. There will also be marketing fees that you will need to pay. Make sure you understand the structure and level of fees, and what you get in return. These fees fund the ongoing support that you receive and the future development of the franchise business.
There are certain risks to be aware of in franchising that might not apply to other types of business. In particular: (a) make sure you have extra funds to cover unanticipated costs over the term of your franchise agreement, for example, the franchisor may change the look/branding of their stores and the franchisee will usually be responsible for the cost of these changes; (b) consumer demands may change in a geographical area; (c) restrictions imposed on product choice, where you will be required to buy products directly from the franchisor even though cheaper alternatives may exist.
Talk to the franchisor’s administrative staff
You should contact and try to meet and ask questions of the people at head office who are responsible for the administration of the franchise system. The information you gather by doing this will give you a better understanding of the people; what their experience is and their level of commitment and endorsement of the franchise system. Having a good working and ongoing relationship with these people will ensure that you can work with them on a regular basis.
Have an exit strategy
Any person thinking of purchasing a business, regardless of whether it is a franchise business or a stand-along business, must consider and put in place an exit strategy, a “succession plan”, a plan which deals with what happens in the future and the options of getting out of such business. It may be done by selling the business, closing it or passing it on to a family member.
Most franchise agreements deal with future sale of the business, as well as death, incapacity and general termination of the franchise agreement. Any exit strategy needs to incorporate the requirements of the franchisor.
However, in the case of a franchise business, it is important to remember that once the franchise agreement ends, the franchisor has no obligation to renew your franchise, so the business and any goodwill you have built could go back to the franchisor. This should be a major consideration of your succession plan.
Get legal advice from an experienced franchise lawyer
You will be presented with many legal documents and required to sign a legally binding contract, usually for five years at a time. You need to get the documents reviewed to know exactly what you are signing up for as there are many details in the documentation that are not usually disclosed to you by the franchisor.
A review conducted by an experienced franchise lawyer will be able to identity for you matters that you may not have considered as part of your due diligence processes, for example there may be store refurbishment costs or re-branding costs that you had not budgeted for.
A good franchise lawyer will encourage you to assess your research in light of the advice provided and allow you the opportunity to ask questions and make sure you are not pressured by the franchisor to make a decision.
Contract Rostom Manookian on 0416 716 960 or email: rostom@manookiansolicitors.com, if you would like to learn more about how Manookian Solicitors can be of assistance, we are happy to talk. Our initial meetings are an investment on our behalf. We take the time to assess your needs and determine an action plan to move forward together.
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