Australia: Top 10 issues to consider when buying a franchise

Last Updated: 26 January 2016
Article by Deva Saraswati

BUYING A FRANCHISE

Buying a Franchise, just like buying any other type of business, is a big undertaking. There are significant issues to be considered, including financial, legal and personal concerns.
If you are thinking of buying a Franchise, you may have spent a lot of time thinking about what type of business and which franchise is the right franchise for you. Something for example in fast food? Finance? Photography? Education? There are so many different types to choose from to get the right fit for you. But there are a few other issues you may have spent less time thinking about, the most important of which we want to discuss here.

  1. What are the financial obligations in the franchise agreement and are they attainable?

Different Franchises have different financial obligations not just the upfront payment or price. Monthly fees, commissions, the level or amount of supplies and stock that you must regularly purchase from the Franchisor, the regular replacement of equipment and even the obligation to re-fit shopfronts every few years. Is the upfront payment more, but the monthly payments less? These obligations can place a significant burden on a new Franchise owner, unless you can be sure that the Franchise will generate enough income to support them. It is important to take a close look at what your obligations will be and obtain advice as to whether they are attainable, and whether you will still be able to make money after all the Franchisor's fees are paid.

  1. Are other Franchisees in the Franchise successful?

Who better to ask if the Franchise is worth buying into than other Franchisees? The disclosure document from the Franchisor should contain the details of other Franchisees, and you should make it a priority to contact as many of them as you can. Ask them the hard questions, including whether they are making money from the Franchise and what the Franchisor is like to work with.

  1. Will the Franchise help or hinder you to meet your life goals?

Why are you buying this particular Franchise? Have you always wanted to run your own business? Is your aim to be hands on with the business, or do you want to be able to put in a manager and just work behind the scenes? Do you want to spend more time outdoors? More time with your family? What are your strengths and weaknesses?
You should consider what your goals are when picking a Franchise to ensure that the one you choose is the right one for you.

  1. What happens if things don't work out?

If you have a falling out with the Franchisor, or you deicide that the Franchise is not the right type for you, what can you do? Does the Franchise agreement give you a way out? Can you sell the Franchise to someone else? Will it be worth buying?

  1. How are you going to structure your Franchise?

Some Franchise Agreements require that their Franchisees use a specific ownership structure. If this is not the case, then you need to consider what structure is best for you. You can establish yourself as a sole trader, a partnership, a joint venture (if you have a business partner), a company or a trust. Each structure has advantages and disadvantages, and you should obtain advice from your accountant and lawyer before deciding which is the best structure for you.

Having the right ownership structure in place will assist to minimise tax and protect your personal assets from risk. It is important to structure your ownership properly from the beginning. If you will have a business partner, even if they are family or a friend, it is important to have a written ownership agreement in place between the business owners.

  1. Will you need premises?

If you will be operating your Franchise from a premises, you will need to either buy or lease premises. If you are leasing premises, you must have a written lease in place, with a term that matches the term of your Franchise Agreement. You should obtain advice on the terms of any lease to ensure you are protected.

  1. Will you need employees?

Does the Franchisor provide employment documentation? If so, is it up to date and compliant? If it is not, or if they do not provide it, you must ensure that you employ your employees correctly, and that you have written employment documentation in place, including employment agreements and policies. You must also check that you are complying with your obligations as an employer, as there are significant fines if you breach employment laws.

  1. What if something happens to you?

Unfortunately, life changing events occur and you and your business need to be prepared. You should have a Will and Power of Attorney in place that make provision as to what is to happen to your Franchise if something happens to you. Any ownership agreement you have should also set out what is to occur if something unexpected happens.

  1. Have you got the right people in your corner?

There are so many aspects to running a Franchise that get forgotten. Have you got the right insurance? What about protecting intellectual property? Have you thought about cash flow? Stock levels? Having the right people in your corner will help you work out the correct structure, employees, stock levels, insurances and cash flow. A good lawyer and good accountant will work closely with you and each other to ensure that your Franchise has everything it needs to run smoothly and will help you set up your structure and essential documentation for your business and help protect your from risk and minimise tax.

  1. Is the Franchise something you are passionate about? Does that matter?

Some people buy a Franchise simply to get into business, and the type of Franchise is not important. For others, the type of Franchise is the most important criteria. A qualified real estate agent may want to run their own agency, a financial adviser may want to have the support of a professional network, a person who loves animals may decide dog grooming is perfect for them. When deciding on a Franchise it is important to do your research and ask the questions. Why are you buying a Franchise? What are your priorities? Is this the right Franchise for you?

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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