As a franchisee, you are buying from someone a right to carry on a business using a system that they own or are entitled to license. As a franchisee, you will need to undertake proper and detailed investigations of the business that you propose to buy to ensure that you get what you pay for.
Franchises carry many of the business risks that exist to any business person. By paying a fee you buy the right to run the business using the franchisor’s model. However, this of itself does not guarantee success. The franchisor is obliged to provide a potential franchisee with a disclosure document and a draft franchise agreement at least 14 days before the prospective franchisee enters into the franchise agreement. Things to consider when buying a franchise include:
- What are you actually purchasing?
- What is the franchisor’s background and experience in the industry?
- How much are you paying?
- Can this money be recovered through normal trading operations?
- What are the ongoing fees?
- What are the marketing contributions?
- Are you granted an exclusive territory?
- Has the franchisor disclosed all materially relevant facts and issues?
- What ongoing assistance has the franchisor promised?
- What do other franchisees have to say about the franchisor?
- Is the franchisor regularly involved in litigation or Court proceedings?
- Is the franchisor prepared to provide you a guarantee of turnover and/or success?
- Are the business models financially sound?
- Are you assured security of supply?
- Must you enter into any other agreements?
- Has the franchisor offered finance?
- If the franchise is terminated, what is the worst case scenario?
This list is not exhaustive and you must consult a properly qualified legal professional before signing a franchise agreement.