Buying a franchise is a big investment decision, both financially and emotionally. Operating a franchise can have major benefits if you fully understand the franchise from the outset. On the other hand, it can have major consequences later on down the track if things go wrong.
Avoid any nasty surprises by following these 4 tips before you agree to buy a franchise.
1. Read the Franchise Agreement and Disclosure Document
The Franchise Agreement sets out all the terms and conditions that will govern the relationship between the franchisor and the franchisee. It also sets out what each party’s rights and obligations are.
The Disclosure Statement highlights the key aspects of the franchise and provides details about the franchisor’s financial position.
The franchisor must provide you with a copy of the Franchise Agreement and a Disclosure Document at least 14 days before you agree to purchase a franchise or make a payment towards the purchase the franchise.
2. Be sure that you can afford the franchise
Your financial commitment to a franchise is not just limited to the initial franchise fee. Most, if not all, franchise agreements require you to pay ongoing fees to the franchisor such as royalty, training and marketing fees. These fees can add up to quite significant amount and as such, you should be sure that the franchise can support these expenses.
3. Obtain independent advice
You should obtain accounting, business and legal advice to help you understand the risks associated with the franchise and identify matters that may be negotiated with the franchisor.
An accountant will provide you with advice about the financial health of the franchisor and franchise, both present and future.
A business advisor will provide you with advice about the market in which the franchise will operate, including the likely lifespan of the franchise and level of competition.
A lawyer will provide you with advice about the parties’ rights and obligations under the franchise and the legal consequences when a party breaches their obligations.
4. Know your cooling off rights
After you sign a franchise agreement or make a payment towards the franchise, you have 7 days to end the agreement for whatever reason (including if you change your mind). You will be entitled to receive a refund of any payments you have made, however, the franchisor is entitled to deduct any reasonable expenses that have been set out in the franchise agreement.
Slater and Gordon has acted for many prospective and existing franchisees involving franchises in a broad range of markets including the retail, domestic household and real estate sectors.