Franchise businesses are usually more successful than a business that starts from scratch. This is because in most cases the franchisor has a proven system of doing business and has established a reputation in the market place. You are also likely to receive ongoing support and training from the franchisor to assist you to acquire the skills to operate your business.
At the heart of your relationship with your franchisor is the franchise agreement. This is usually a complex document which sets out the rules and obligations in operating your franchise business. It is essential that you understand these rules and obligations and a franchise lawyer will assist you in understanding them. The lawyer will also have the experience to know what is standard within the franchise community and will not spend time trying to negotiate provisions which are non-negotiable. A good franchise lawyer should also be able to provide you with quality practical advice on owning and operating a franchise business.
By its very nature a franchise agreement is one sided in favour of the franchisor. This is because the franchisor has spent considerable time and money developing the franchise system and establishing reputation in the market place. It is essential that all franchisees operate in accordance with a set of uniform rules to ensure that that the integrity of the brand and the system are protected. Often these rules are very comprehensive to ensure strict compliance with the system.
A Franchise Agreement will usually cover the following matters:
A franchise is where one party (the franchisor) grants another party the right to run a business using a system and intellectual property which has been developed by the franchisor (the franchise system). The franchisor and the franchisee enter into an agreement (the Franchise agreement) which sets out each other’s rights and obligations in respect of the franchise. Usually there is an initial fee payable by the franchisee (the initial franchise fee) for the grant of the franchise and ongoing fees payable for the use of the franchise system and support received from the franchisor during the term. The franchisee is usually granted the right to operate its business in accordance with the franchise system for a limited period of time (the franchise term). At the end of this time the franchisee may have a right to renew the agreement for a further period of time on satisfying certain terms and conditions. If not the franchise will come to an end and the franchisee will no longer have the right to operate the business using the franchise system.
The main disadvantage with purchasing a franchise is the restrictions that are placed on you in operating your business. You are required to strictly comply with the rules of the system and cannot deviate from them without receiving the franchisor’s approval. The franchisor has developed these rules to ensure that there is conformity amongst franchisees – to ensure that customers get the same experience no matter what from all franchisees. The rules are also based on the franchisor’s experience of what works. You will have to pay fees to the franchisor – the initial franchise fee and ongoing fees. However these fees need to be weighed against the costs to you of running your own business and perhaps making costly errors on the way. At least with a franchise you are operating a business according to a proven system and your chances of making costly errors are diminished. You are usually only given the right to operate your system for a limited period of time. It is therefore essential that you determine whether your purchase of the franchise will provide you with a reasonable rate of return during that limited period.
You should undertake considerable research before purchasing a franchise. This is called due diligence. In determining whether a franchise is right for you, you should consider the following:
Refer to our Franchisee Checklist – Buying a Franchise.
This is best done in consultation with your franchise lawyer and accountant. They will assist you in conducting your due diligence. A franchise lawyer will advise you on what legal documentation you should be looking at – for instance; the lease, franchise agreement, disclosure document, employment agreements, terms of trade. He or she will also provide you with advice on your obligations under the documents. Your franchise accountant will advise you on what financial information you need from the franchisor and will assist you in evaluating this information to determine whether the franchise could provide you with a reasonable return on your investment. You should speak with existing franchisees so that you have a good understanding of what is the reality of operating the franchise? You need to ask yourself whether the franchise is right for you.
Just like with lawyers not all accountants have experience in evaluating the financial information associated with a franchise. An experienced franchise accountant will provide you with advice as to what financial information you will require and will assist you in evaluating this information to determine whether the franchise will provide you with a reasonable return on your investment. The accountant will have the experience to know what is or is not normal from a financial perspective in the franchise community. The franchise accountant will also be able to give you advice as to the best structure for you from a tax perspective.
The franchisor has spent considerable time and effort in developing the franchise system and establishing brand awareness in the market place. It is essential that both the system and its reputation are protected to the greatest extent possible. One way of protecting the system and reputation is to ensure that all franchisees operate according to the same set of rules. It is this conformity which enhances both the system and the brand. This is the main reason why the terms of the franchise agreement are non-negotiable.
Check Questions to Ask the Franchisor for further information.
It is essential that you get legal advice before entering into a lease. Your franchise lawyer will be able to provide you with advice on the terms and conditions of the lease – for instance the title arrangements, rent review and renewal provisions. As far as possible the term of the franchise agreement should match up with the term of the lease. Most franchisors will have rights in respect of the lease – you should understand exactly what these are. Before you enter the lease you will need to do your due diligence on the location – is this a good location for the business? What has been the experience of different tenants? Are there any proposed developments which will impact on the business? Are there any council restrictions which are relevant? Do you need to get any licences to conduct the business?
In most cases the amount of legal fees will be determined by the amount of time your franchise lawyer spends on your purchase. Obviously, the more negotiations and issues which arise the more the fees will be.
Fortune Manning can provide you with a fixed price for the purchase or sale of your franchise which will cover everything that is typically involved in these transactions. Contact us for more details.
Researchers say our brains do their best to keep us from dwelling on our inevitable demise. It is probably no…
Have you ever been stopped by the police while driving and wondered what information you have to provide them? This…
Transferring your assets to a trust even before you are in a de facto relationship, does not prevent those assets…
With Christmas approaching, employers are again having to navigate the complexities of the Holidays Act. New legislation, providing clear methods…
In this 2022 Supreme Court’s decision, the Court confirms the relevance of the conduct of the party cancelling an agreement.…
This website uses cookies.