Franchise Business Lawyers | Greyson Legal
Leading Franchise Lawyers
A Guide for prospective Franchisees considering buying a Franchised Business
Fulfilling the dream of owning your own Business is often cited as big driver behind why individuals leave the paid employed workforce and become entrepreneurs. When the right opportunity "knocks", Franchising can be an effective vehicle which allows entrepreneurs to operate their own Business.
If you are considering buying a Franchised Business, typically you have two options:
- acquiring what is sometimes called a "greenfields site" direct from the Franchisor; or
- buying an existing Franchised Business from an independent Franchisee - often referred to as a a Franchise "re-sale".
In either case, it is essential before you commit to buying a Franchised Business that you undertakes a thorough due diligence investigation of matters relevant to the proposed purchase and obtain appropriate professional advice.
At Greyson Legal we have extensive experience and knowledge with respect to franchising and franchised business sales and acquisitions.
We can provide advice and assistance across a range of matters including, among others:
- the type of entity structure you may wish to use to operate the Franchised Business;
- the application of the Franchising Code of Conduct;
- the franchising business conveyance process;
- understanding the advantages and disadvantages of buying a franchise;
- review and guidance regarding the Franchise Agreement, Disclosure Document and related legal documents;
- helping you decide if acquiring a new greenfields franchise site or territory is a better option compared to buying an existing Franchised Business;
- leasing and licensing issues in connection with the franchise;
Like any investment, purchasing a franchise is not a guarantee of success. Obtaining appropriate legal advice can help you to be fully informed of your legal rights and obligations and minimise the risk of making a poor investment decision.
- are looking to buy an existing Franchised Business;
- need help understanding a Franchise Agreement;
- not sure how the Franchising Code of Conduct applies;
- are considering acquiring a new greenfields franchise site or territory; or
- are just after general franchise law advice,
Greyson Legal can help you. Contact us for a no obligation discussion.
See the testimonials of some our Franchise clients
What is Franchising ?
Franchising is a method of growing a business by which a Franchisor offers its Franchisees:
- rights to use certain intellectual property;
- branding association;
- the right to offer, sell or distribute goods or services under a business system determined by the Franchisor;
- access to systems, processes and procedures;
- management support;
- leadership and guidance;
In return, the Franchisee agrees to pay certain initial and ongoing fees and comply with a range of obligations - typically set out in a Franchise Agreement, Operations Manual and ancillary documents.
The Franchising industry has faced a number of challenges in recent years, exhibited by a mix of:
- rogue Franchisors;
- negative media coverage of certain Franchisors and the franchising industry;
- instability in financial markets leading to negative consumer sentiment;
- constrained consumer spending; and
- competition for the consumer dollar.
Despite this, franchising remains a popular vehicle by which individuals can acquire rights to commence a new (or "greenfields") Franchised Business or purchase an existing Franchised Business that is already trading.
For a broad overview of the franchising sector in Australia, refer to Griffith University's publication - Franchising Australia Report 2014.
Selecting a Franchise Checklist
There are a number of factors to evaluate in deciding whether owning a Franchise Business is right for you. Some of these factors will relate to:
- the Franchisor, the Franchise System and selecting that which best matches your requirements; and
- your background, education, experience, goals and the capital you wish to invest.
Below are examples of a few issues to consider:
- Has the Franchisor been in existence for some time ?
- How well known is the brand ?
- What is the background and reputation of the Franchisor ?
- Is the Franchise system proven ?
- What are the likely costs both at the beginning and ongoing - such as, the Franchise Fee or royalties ?
- How long is the franchise term and can it be renewed ?
- What training and support will be provided by the Franchisor ?
- Are you required to contribute a Marketing Fund ?
- What promotion and advertising strategies does the Franchisor adopt ?
- Will you be provided with an Operations Manual ?
- Is the territory to be granted to you exclusive or non-exclusive ?
- Is there a demand for the Franchisor's products or services in the market ?
- What is the level of competition ?
- What are the supply chain mechanisms ?
- Does the Franchisor provide revenue &profit projections ?
- Will the Franchised Business operate from fixed premises ? If so, what are the Lease terms and conditions and are they consistent with the Franchise Agreement?
- Have you undertaken appropriate due diligence ?
- Do you have a Business Plan ?
- How much money do you have to invest ?
- How much money can you afford to lose if the Business venture is unsuccessful ?
- Do you have the ability, skill and attitude to operate your own Business ?
- Running a Franchised Business is not like a 9 to 5 job - are you prepared to put in the extra hours needed to make the Franchised Business successful ?
- Are you willing to follow standards and guidelines imposed by the Franchisor ?
Advantages and Disadvantages of becoming a Franchisee
When considering whether to become a Franchisee, you need to weigh up the advantages and disadvantages of franchising as a business model versus operating a more traditional business format, such as trading on your own account. Below is a list of few matters to consider:
Financial institutions are generally more willing to lend where the Franchised Business is part of an existing and proven Franchise System.
Also, some Franchisors offer prospective Franchisees vendor finance to assist with acquiring the Franchised Business.
It can be lengthy, costly and difficult to establish, document and maintain internal business processes.
Becoming a Franchisee has the advantage of being able to use the Franchisor's already existing business processes.
Becoming a Franchisee means you are part of a franchise network which follows a system of standardisation.
As such, once you are a Franchisee you will have limited scope for originality or creativity as a Business owner.
If you prefer flexibility and the ability to make your own decisions about how your Business operates - then franchising may not be the right fit for you.
Products and Services
Franchise Systems are based on consistency of product type and service delivery across the franchise network. When you become a Franchisee, you get the benefit of this standardisation as customers already know what to expect.
When you acquire a Franchised Business you are given access to the know-how, procedures, training, management, skills and assistance of the Franchisor. This can be advantageous as you will have someone else to fall back on for advice and guidance.
Some Franchise Agreement impose restrictions on which suppliers (called "Approved Suppliers") you can deal with. Where economies of scale have a positive impact on pricing this can be advantageous to the Franchisee. But, if the Approved Suppliers price their products at a higher rate compared to other suppliers, then this could be a disadvantage.
Economies of Scale
Franchisors can often achieve economies of scale and improve their buying power by aggregating the purchasing of all Franchisees within the franchise network.
The savings on supply obtained can then filter down for the benefit of the Franchisee. However, not all Franchisors pass on any rebates they may obtain - so checking with the Franchisor and the terms of the Franchise Agreement is essential.
Franchisees have the benefit of associating themselves with the already established brand of the Franchisor.
Whereas, a newly established Business owner trading under their own steam needs to not only build their own brand (which takes time) but also incur upfront and ongoing costs creating and maintaining their own intellectual property.
KPIs (Minimum Performance Targets)
Using key performance indicators (KPIs) is a tool that can benefit not only Franchisors and Franchised Businesses, but also individual Business operators trading on their own account.
Once main difference though, is that failure by a Franchisee to meet KPIs under the terms of their Franchise Agreement can lead to enforcement measures by the Franchisor including potential termination of the Franchise Agreement. When considering acquiring a Franchised Business it is critical to check these KPIs to make sure they are achievable and to ensure there is a reasonable process of enforcement when KPIs are not met.
As a Franchisee you are part of a broader franchise network with other franchisees. This has the advantage of allowing you to leverage off their experience and can be a source of guidance and increasing morale.
But, poor performance of other franchisees in the franchise network can impact negatively on the reputation of the Franchisor, the brand and your Franchised Business.
Usually Franchise Agreements are only for a fixed initial term followed by one or more "options" or renewal terms. Once that period ends the Franchisee is unable to continue trading under the Franchisor's brand or use the Franchisor's know-how, etc.
As such, when buying a Franchised Business it is important to ensure the initial term and any renewal terms of the Franchise Agreementare sufficiently long enough to obtain a return on the investment.
Greenfields Site Acqusitionsversus Franchise Re-Sale
Greenfields Site Acquisitions
When acquiring a "greenfields" site as a prospective Franchisee, you need to consider additional factors that do not apply to the purchase of an existing Franchised Business (or re-sale). For example:
- the Franchised Business is being built from the ground up at the selected site or territory, so will take more time to grow;
- you will be creating new goodwill - as opposed to buying existing goodwill;
- the price you pay for the site may be lower than the purchase price to acquire an established Franchised Business;
- where the new Franchised Business operates from fixed premises, the franchise outlet will need to be newly fitted out;
- as there is no trading history there will be a degree of guesswork as to the expected volume of products and services that can be sold;
- there will be initial uncertainty as to quantum of revenue that can be generated and profitability;
- you get the advantage of implementing the latest in design and technology;
- as a new franchise outlet you will not have existing employees - if you need new staff and they will have to be fully trained in your systems and processes;
- you will need to expend more in marketing in the initial stages to get the Business name out into the market;
If you need help and advice about the process for acquiring a greenfields Franchised Business, contact Greyson Legal for a confidential discussion.
Buying an existing Franchised Business by way of re-sale has the advantage that:
- the initial set-up has already been done;
- there is a trading history;
- there is an existing customer base and goodwill;
- staff familiar with the business may already be in place;
- you can see what is already there and assess what needs updating.
Greyson Legal's experienced Franchising team can offer advice at every step of the franchising business conveyance process and assist you with all of the key aspects.
When you are looking to purchase an existing Franchised, we can:
- assist you to satisfy the Franchisor's requirements for consent to the Franchised Business purchase, including reviewing and advising you on the conditions set out in the Franchisor's Deed of Consent to Assignment;
- undertake all requisite searches;
- review and advise you on the terms and conditions of the Contract of Business Sale;
- review and advise you in regards to any associated lease, occupancy licence or lease assignment documentation;
- identification of the tangible and intangible assets to be bought or sold;
- assist with any statutory Business licenses;
- deal with employee transfers;
- ensure the release of security interests held by 3rd parties over the Seller's plant and equipment;
- undertake all steps required to settle the transaction;
- carry out all work incidental to the transfer of the Franchised Business.
Franchise Agreement and Other Legal Documents
A thorough review of the Franchise Agreement, Disclosure Document and ancillary franchise documentation should be undertaken before signing the Franchise Agreement or any agreement to enter into a Franchise Agreement.
The Franchise Agreement sets out the key information about the franchise being entered into. The terms and conditions can be very complex and advice from experienced franchise lawyers, such as Greyson Legal, should be obtained.
Each franchise system will have their own Franchise Agreement. As a result, there is no standard Franchise Agreement that applies. However, a number of topics are typically covered comprising , among others:
- the term and options (or renewal terms);
- what happens at the end of the term;
- what territory or site;
- Franchised Business location - if a fixed site;
- provisions about premises leases or occupancy licences - if a fixed site;
- whether the Franchise system includes advisory councils;
- the type and extent of Franchisor training;
- what Franchisor support is provided;
- whether the Franchisor utilises a marketing fund;
- the extent to which the Franchisor controls the pricing of the products and services the Franchisee will sell;
- what Franchise fees must be paid (and other costs);
- how the Franchised Business must be operated;
- the process to follow if the Franchised Business is sold;
- restraint of trade provisions (to apply both during the term and after expiry or termination);
- provisions related to confidentiality, intellectual property, default and termination;
At Greyson Legal we can provide an extensive review and advice on the:
- terms and conditions of the Franchise Agreement;
- supporting Disclosure Document;
- associated legal paperwork; and
- the Franchising Code of Conduct.
Where possible, we endeavour to offer a fixed price for the review and advice.
Our advice is designed to:
- draw your attention to the key aspects in the Franchise Agreement and associated documents;
- comment on the implications for you;
- highlight changes that we recommend be made to the Franchise Agreement or other legal documents;
- indicate how the Franchise Agreement compares with normal franchising practice;
- point out any areas where the franchise documents provided by the Franchisor do not comply with the Franchising Code of Conduct;
- detail where further clarifications should be sought from the Franchisor;
- highlight any particularly onerous provisions.
If you are looking for experienced and down to earth franchise lawyers, with a track record of successfully helping clients purchase a Franchised Business - then Greyson Legal is the firm for you. We welcome your enquiry.