Commercial lease clause

What to consider before you buy a franchise

Are you considering franchise ownership? Buying a franchise means that you're purchasing the right to run a business using a system that is owned or licensed by a franchisor. This allows you to leverage an already established brand, which may help to minimise the risks involved and increase your chances of success.

However, like any investment, thorough evaluation and due diligence are a must. This guide is for potential franchisees, detailing what you need to consider to ensure that the opportunity aligns with your goals and expectations.

Understanding the Franchise Model

As a franchisee, you're purchasing the right to operate a business using the franchisor's business structures and support system. This includes:

Proven business model: A pre-defined approach to running the business and an operational system in place.

Brand recognition: The benefit of operating under a recognised and trusted brand with loyal customers.

Ongoing support: Guidance and training from the franchisor to help you succeed.

Conducting Due Diligence

The franchisor is legally obligated to provide a Disclosure Statement and a draft Franchise Agreement at least 14 days before signing. Use this information and conduct your own research to answer critical questions:

What you're buying: Clearly understand the rights, obligations, and any limitations you are acquiring, including the use of trademarks, business systems, and support services.

Franchisor expertise: Research the franchisor's background, experience, and reputation within the industry to assess their ability to support your business success.

Financial investment: Determine the initial franchise fee, ongoing fees, and marketing contributions to ensure they are fair and justifiable based on the value provided.

Recovery of investment: Evaluate if you can recover your investment through normal trading operations and assess the financial projections provided by the franchisor.

Territory rights: Does the agreement grant you an exclusive geographic territory to operate your franchise? Assess its size and potential for growth.

Disclosure requirements: Ensure the franchisor has disclosed all material information, including litigation history and financial performance.

Franchisor support: What ongoing assistance and training does the franchisor offer? Clarify the type and extent of ongoing support.

Franchisee feedback: Seek feedback from existing franchisees to understand their experience with the franchisor and the overall satisfaction level.

Franchisor litigation history: Investigate any past or ongoing legal disputes involving the franchisor.

Guarantees of turnover or success: Assess any guarantees or promises made by the franchisor regarding the business's performance or success rate.

Financial model strength: Carefully analyse the financial model presented by the franchisor. Does it appear sound and sustainable?

Supply chain security: Ensure a reliable supply chain for the products or materials required for your franchise operation.

Additional agreements: Review any additional agreements required by the franchisor, such as equipment leases, supplier contracts, or financing terms.

Financing options: Evaluate if the franchisor offers financing or if you need to secure funding independently.

Termination scenario: Understand the implications of franchise termination and the potential financial consequences.

P&B Law can be your partner throughout the franchise evaluation process. Get in touch to schedule a consultation and receive expert legal guidance in making informed decisions about your franchise ownership opportunity.

Please note: The information covered in this guide is general and should never be substituted for professional legal advice. Contact us for further information.