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15 March 2024

Looking to buy a franchise? Here are some considerations franchisees need to make

P
PCL Lawyers

Contributor

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Insights and guidance for those considering buying a business and operating within a franchise group.
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For aspiring entrepreneurs, franchising offers a compelling pathway into establishing a business. But with its unique structure and inherent complexities, understanding what a franchise entails is crucial to making an informed decision.

The franchising world is highly regulated and has unique procedures and processes, which if properly understood, will help you make the most informed decision when looking to buy a franchise.

Our franchise lawyers provide insights and guidance for those considering buying a business and operating within a franchise group.

What is a Franchise?

A franchise is a business model where a franchisor licenses its brand, business model, and trademarks to a franchisee in exchange for a fee. The franchisee operates its own business under the franchisor's established brand and system, benefiting from its established reputation, marketing strategies and operational expertise.

By operating within the franchise model, franchisees can skip the start-up stage and rely on n existing and proven business model.

Key Considerations when buying a franchise

When operating as a franchise, you will be required to pay an establishment fee before commencing business, as well as ongoing costs for things like royalties and use of intellectual property, usually taken as a percentage of profits.

Franchisees must adhere to the franchisor's conditions of operating its franchise, which covers all aspects of the business, from operations, training and marketing.

What you need to pay the franchisor and any ongoing expectations are set out in the Franchise Agreement, a contract which must be reviewed by a lawyer before being entered into or renewed.

It is important that you understand your obligations under the franchise agreement, any ongoing costs and the expectations placed on you by the franchisor, as non-compliance can lead to termination of the franchise agreement and the loss of your franchised business.

We recommend that you obtain both financial and legal advice before entering into a franchise agreement to ensure that you understand the nature of the business, your expected expenses and your obligations.

What are the advantages of operating as a franchise?

Streamlined Agreements: franchise agreements act as comprehensive legal blueprints clearly outlining the rights, responsibilities and limitations of both franchisor and franchisee. This avoids ambiguity and reduces the likelihood of disputes arising later.

Reduced Compliance Burden: franchisors often have established legal frameworks and standard operating procedures in place, ensuring compliance with relevant regulations and industry standards. This relieves franchisees of the burden of navigating compliance landscapes on their own, particularly in the food industry. Some franchisors have dedicated compliance teams to ensure adherence to relevant laws and regulations across the business, which, in turn, reduces legal risks for its franchisees.

Intellectual Property Protection: franchisees benefit from established intellectual property (IP) protection, including trademarks, copyrights, and trade secrets. The franchisor's established presence ensures proper IP registration and enforcement, protecting the brand and business model.

Standardised Dispute Resolution: many franchise agreements include dispute resolution mechanisms like arbitration or mediation, offering faster and more efficient solutions to potential conflicts compared to traditional litigation.

Favourable Supplier Terms: franchisors, being well-established, can negotiate favourable terms in supplier and vendor contracts, which franchisees can leverage to secure better pricing and terms.

Limited Liability Protection: In some instances, franchisees may benefit from limited liability protection, shielding their personal assets from certain business liabilities.

What are the disadvantages of operating as a franchise?

Lack of Autonomy: franchise agreements typically impose strict obligations on operations, marketing and training. Some franchise agreements might require a franchisee to only purchase certain goods from a specific supplier.

Franchisees can find their decision-making ability is limited by such obligations which are made generally by the franchisor and may not be specific to the needs of their own business or region.

Financial obligations: some franchise agreements may require significant outlays at nominated periods. For instance, the requirement to update a fitout consistent with a brand's identity regardless of the current performance of the business.

Other franchisees might be required to maintain high levels of insurance. The mandatory aspects of some payments means that franchises may not cope well with significant economic downturn.

The suppliers to your business may be mandated, or the cost may be negotiated, by the franchisor. Sometimes these arrangements do not benefit the franchisee and can be a costly alternative.

The franchise is for a limited time: it is important for potential franchisees to note the time of the franchise licence. Unlike your own business you don't own the business indefinitely. The franchise reverts to the franchisor at the end of the licence period, which may not be renewed. To make your business successful you will need to exert a lot of energy and capital so it's important to consider the lifespan of the franchise agreement in your calculations.

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