Buying a franchise business is a significant investment. Therefore, it is important for a future franchisee to minimise their risk by obtaining proper legal (and financial) advice prior to entering into a Franchise Agreement. Vault Legal can provide tailored legal advice to assist you with any prospective acquisition of a franchise.

Key Issues When Buying a Franchise Business

1. Important financial information. This includes financial statements (such as balance sheets and profit and loss statements) for the current year and financial statements for the last three years. Key question to consider – is the franchise business and franchisor profitable?
2. Fees relating to the franchise. These typically include establishment fees, ongoing royalty and marketing fees, training fees, premises fit-out fees, equipment and inventory fees and franchise transfer or assignment costs. Key question to consider – can a franchisee operate the franchise business profitability given the range of fees payable to the franchisor?
3. Legal compliance. Questions to consider include the following. Do you need licences or permits to operate the franchise business? Are there any restrictions on selling, staffing, pricing and supply arrangements? Is the intellectual property in the branding and products protected? Has a Franchising Code of Conduct and a Disclosure Document been provided to you? Have you sought independent legal and financial advice before entering into the Franchise Agreement?
4. The premises of the franchise business. Matters to take into account include the following. Will the franchisor be leasing the business premises to you? Does the lease permit assignment and are there any conditions to the grant of an assignment? Does the lease term coincide with the franchise term? Is there a right to renew the lease? Does the lease term provide sufficient time for recovery of capital outlay? Is the premises located in a high-foot traffic area?
5. Understanding the franchise business and the franchisor. Issues to consider include the following. How long has the franchise business been operating? Have you considered the market, customer base, brand recognition and product range of the franchise business? Have you studied the suitability of the exclusive/non-exclusive territory and site selection of the franchise business? Who are the competitors of the franchise business and is competition increasing or decreasing and why? Does the franchisor comply with the Franchising Code of Conduct? Does the franchisor have a good reputation and financial/credit standing? Is the franchisor involved in any disputes with its franchisees, suppliers or customers? What is the turnover of franchisees?

As has been demonstrated, there are many complex issues to consider prior to purchasing a franchise business. To speak to a lawyer before entering into a Franchising Agreement, call Vault Legal today on 1300 002 212 or email us at info@vaultlegal.com.au.

Key words: franchise, franchise agreement, franchising code of conduct, franchisee and franchisor.