THINGS TO CONSIDER BEFORE BUYING A FRANCHISE

Oh, wouldn’t it be wonderous to say, yes Ronald McDonald is like family because I am a McDonalds franchise owner. Or maybe you absolutely love the concept of brand of soy wax candles sold in your suburb and you want to become a franchisee of that soy wax candle brand.

Whichever question you just said yes to, you must remember there are several considerations you must consider before putting your million-dollar signature at the bottom of that franchise agreement.

Buying a franchise is an ongoing relationship for an agreed period so it is very important to consider all aspects of the relationship before committing yourself to it.

So before going in depth into what you should be asking yourself, lets first cover the basics.

  • Who and what regulates the franchising industry?
    Who:
    Australian Competition and Consumer Commission (ACCC).
    What: The Franchising Code (the Code) that is a mandatory industry code across Australia that regulates the conduct of franchising participants towards each other.
  • What is a Franchisor?
    To put it in simple terms, if you’re looking to buy a McDonald’s franchise then McDonald’s Australia Limited would be the Franchisor, so basically it is the original or existing business that sells the right to use its name and idea.
  • What is a Franchisee?
    A franchisee is a person or company that is granted a license to do business under a franchisor’s trademark, trade name, and business model in a certain area, so potentially, YOU!


The initial questions you should really ask yourself is why and how? Why do you want to buy a franchise? How will you and can you manage the income repercussions of having and running a business?

The Franchising Australia 2016 report by Griffith University notes that the total start-up cost for a new retail franchise is around $287,500 compared with $59,750 for a non-retail franchise which includes an initial franchise fee of $31,500 in retailing compared to $28,000 in non-retail franchises.

You should now ask yourself; am I committed to developing my understanding of the franchise relationship and conduct myself as the Code prescribes and do I have adequate borrowing capacity, including working capital, to successfully establish this type of business? The answer to these two questions will be one of many indicators for prospects of your success.

If the answers to the questions you’ve asked yourself to this point have been YES, it is highly likely that you feel like you are read to buy a franchise. So, what’s next?

Now you must find a franchise that you want to buy, make sure it is the right one for you and then begin negotiations with the Franchisor, to enter into a Franchise Agreement.

During the negotiation process right up to signing the franche agreement, make it a priority that you receive legal and accounting advice from lawyers and accountants with franchise experience before making any final commitment. A franchise agreement governs the relationship between the franchisor and franchisee. It specifies the terms of the franchise obligations such as rights and responsibilities of the parties, fees and payments and the duration of agreement.

What should you look out for in a Franchise Agreement?

The clauses in this agreement that you should properly review and understand before signing are:

  1. Term and Renewal
    A franchise agreement is legally binding, and fixed, and it is uncommon that a franchise agreement will include a clause that allows the franchisee to terminate the contract early.
    Possible pitfall: If you don’t read renewal terms, you can miss restrictions on your renewal right and any conditions that may be tied to this renewal; these conditions can sometimes be so strenuous that its impossible to meet them therefore sabotaging your renewal right.
  2. Intellectual property rights
    This clause must precisely set out how the franchisee may use the franchisor’s intellectual property.
    Possible pitfall: The limits of the rights given to you as a franchise to use the trademark and trade name will be stipulated in this clause, so you must make sure that you are agreeable to the limits put in place by the franchisor.
  3. Obligations of the Franchisee
    This clause will highlight the franchisor standards that the franchisee must abide by.
    Possible pitfall: You could be agreeing to upgrade the fit-outs or television advertisements every 6-months at your own costs.
    This is only one of the many obligations that the agreements can stipulate, so make sure to read, understand and agree to these obligations.
  4. Franchise Territory
    this clause describes the region that you will be operating in and whether you will have exclusive or shared rights to the territory.
    Possible pitfall: you should read and understand your territory as well as the competition around, you don’t want to be stuck in a situation where there are too many competitors within the same franchise.
  5. Fees and Payments
    Payment of upfront fees as well as ongoing contributions towards marketing and royalties.
    Possible pitfall: The royalties stipulated in the agreement should match up to what was promised by the franchisor. What matters most is establishing whether the percentage will be calculated based on the franchise’s profit or on its turnover. If it is the latter, the franchisee must continue to pay the same fee even if the business is operating at a loss.
  6. Termination
    This clause details the process that should be followed if you decide not to renew the franchise after the lapse of your term.
    Possible pitfall: Sometimes the franchisor is given all the termination rights and franchisee is given close to none. Make sure you negotiate your termination clauses.
  7. Post-term obligations
    This clause will highlight the steps that need to be taken at the end of your term more specifically in how confidential materials must be returned, ceasing to use intellectual property, and the paying of outstanding fees to name a few.
    Possible pitfall: Your agreement can contain competitive and other restrictions that will limit the options you have available after your term ends.

 

What if you want to opt out after signing the agreement because you have now realised this is too overwhelming or just no right for you?

Under the Franchising Code of Conduct, you have a right to terminate a franchise agreement without giving a reason withing 7 days; this is known as the cooling-off period and must be implemented within 7 days of entering into the agreement or making a payment under the agreement. If you terminate during the cooling-off period, the franchisor must refund any money paid by the franchisee within 14 days, after accounting for the franchisor’s reasonable expenses. The cooling period allows franchisees to check their facts and figures and determine if they still want to progress.

At the end of this article and at the end of the day the decision is yours. It is of high importance for you to know what you are going to do and knowing the waters you will be entering. A franchise agreement is a complex document and the best advise that I can give is for you to get a lawyer to review the franchise agreement. They will be able to point out harsh or unfair provisions as well as identify and advise you about any red flags. Understanding key points before signing could stop you from making a massive mistake.

Be leisurely in researching and analysing your path and at the end of that period of discovery you will know the right decision for you.

Related Articles