Buying a Franchise Business, Multiple Legal Contracts

Buying an existing franchise business is rarely as straight forward as signing and settling a Sale and Purchase of Business Agreement (S&P Agreement) with the vendor. It can be a complex and rather costly exercise involving up to four important legal contracts to review and comply with.
 
Legally, there are a number of strands that need to come together, and it is important to identify and understand these before you sign a S&P Agreement. The S&P Agreement should set out the things that need to happen (“conditions”) for the sale to proceed; and give you time to organize / complete all these steps; a reasonable period to carry out general due diligence on the business, franchisor and lease; and the option to cancel if things are not as you wish or cannot be completed. If your S&P Agreement doesn’t cover these you could find yourself with a business that you cannot effectively run, or in a dispute because you weren’t able to finalise the purchase on time (or at all).
 
The business purchase is a one off transaction. The entry into a Franchise Agreement involves a whole layer of legality and ongoing relationship to be reviewed and entered into. Note that a vendor of a franchise business normally needs prior franchisor consent to sell their business. A good franchisor will want to be involved in the process from an early stage. Often a franchisor will govern the whole process and give you (and your lawyer) clear instructions and expectations for what is required with dates, interviews, training and other requirements. Other franchisors may have very little active involvement. If there is no obvious approval or training process it could indicate an uninterested or absent franchisor.
 
A purchaser’s due diligence on a franchise business needs to focus on the Franchise Agreement and franchisor structure as much as consideration of the business itself. Often the purchaser will have to sign a new Franchise Agreement and this could be an updated version from the one the vendor signed. Ensure you see a copy of the exact Franchise Agreement you will sign, and preferably have it reviewed by a lawyer experienced in franchising before you agree to proceed. It is also very important to work with your accountant during the process of researching the business.
 
In addition to the contracts with the vendor and the franchisor, in many business purchases the purchaser takes over the Lease for premises The Lease is a legal contract under which you enter an ongoing legal relationship as a tenant with the landlord. You (or your lawyer) will have to review and approve the Lease and go through an approval process with the landlord who will need proof that you are a financially sound, suitable tenant. A Deed of Assignment has to be prepared and finalised usually involving your lawyer, the landlord’s lawyer and often the vendor’s lawyer. If the franchisor has direct rights under the lease then the franchisor and their lawyer may also become involved in the process.
 
It pays to have the lease reviewed by a lawyer who is familiar with commercial leases. They are quite different to residential leases. The rent can be reviewed (upwards) regularly, the tenant is usually responsible for all outgoings, certain maintenance, you are normally tied in to paying rent and outgoings for the whole term of the lease and cannot leave on short notice. Also in mall leases there are often clauses that require you to pay marketing fees, pay levies for mall management and services, remain open for minimum hours and pay increased rental if your turnover increases. You need to know these things before you sign.
 
For many purchasers external finance will be required. For most people this means dealing with banks. The bank will need to be satisfied that the business you are purchasing along with your ability to secure lending against existing properties or guarantees meet their current criteria – and it is no secret that in recent times banks have been cautious with business lending. It helps if the bank knows and respects the franchisor. Sometimes a refusal to fund a franchise purchase may be a warning sign that the particular franchise chain is not performing.
 
It is important that the S&P Agreement contains suitable clauses to cover all aspects of the purchase. As lawyers we often throw up our hands in despair at what is missing in signed contracts presented to us by our clients. We recommend you work with an experienced Franchise Business broker and don’t sign anything unconditionally until your lawyer has reviewed it and ensured all the strands tie together.Buying an existing franchise business is rarely as straight forward as signing and settling a Sale and Purchase of Business Agreement (S&P Agreement) with the vendor. It can be a complex and rather costly exercise involving up to four important legal contracts to review and comply with.
 
Legally, there are a number of strands that need to come together, and it is important to identify and understand these before you sign a S&P Agreement. The S&P Agreement should set out the things that need to happen (“conditions”) for the sale to proceed; and give you time to organize / complete all these steps; a reasonable period to carry out general due diligence on the business, franchisor and lease; and the option to cancel if things are not as you wish or cannot be completed. If your S&P Agreement doesn’t cover these you could find yourself with a business that you cannot effectively run, or in a dispute because you weren’t able to finalise the purchase on time (or at all).
 
The business purchase is a one off transaction. The entry into a Franchise Agreement involves a whole layer of legality and ongoing relationship to be reviewed and entered into. Note that a vendor of a franchise business normally needs prior franchisor consent to sell their business. A good franchisor will want to be involved in the process from an early stage. Often a franchisor will govern the whole process and give you (and your lawyer) clear instructions and expectations for what is required with dates, interviews, training and other requirements. Other franchisors may have very little active involvement. If there is no obvious approval or training process it could indicate an uninterested or absent franchisor.
 
A purchaser’s due diligence on a franchise business needs to focus on the Franchise Agreement and franchisor structure as much as consideration of the business itself. Often the purchaser will have to sign a new Franchise Agreement and this could be an updated version from the one the vendor signed. Ensure you see a copy of the exact Franchise Agreement you will sign, and preferably have it reviewed by a lawyer experienced in franchising before you agree to proceed. It is also very important to work with your accountant during the process of researching the business.
 
In addition to the contracts with the vendor and the franchisor, in many business purchases the purchaser takes over the Lease for premises The Lease is a legal contract under which you enter an ongoing legal relationship as a tenant with the landlord. You (or your lawyer) will have to review and approve the Lease and go through an approval process with the landlord who will need proof that you are a financially sound, suitable tenant. A Deed of Assignment has to be prepared and finalised usually involving your lawyer, the landlord’s lawyer and often the vendor’s lawyer. If the franchisor has direct rights under the lease then the franchisor and their lawyer may also become involved in the process.
 
It pays to have the lease reviewed by a lawyer who is familiar with commercial leases. They are quite different to residential leases. The rent can be reviewed (upwards) regularly, the tenant is usually responsible for all outgoings, certain maintenance, you are normally tied in to paying rent and outgoings for the whole term of the lease and cannot leave on short notice. Also in mall leases there are often clauses that require you to pay marketing fees, pay levies for mall management and services, remain open for minimum hours and pay increased rental if your turnover increases. You need to know these things before you sign.
 
For many purchasers external finance will be required. For most people this means dealing with banks. The bank will need to be satisfied that the business you are purchasing along with your ability to secure lending against existing properties or guarantees meet their current criteria – and it is no secret that in recent times banks have been cautious with business lending. It helps if the bank knows and respects the franchisor. Sometimes a refusal to fund a franchise purchase may be a warning sign that the particular franchise chain is not performing.
 
It is important that the S&P Agreement contains suitable clauses to cover all aspects of the purchase. As lawyers we often throw up our hands in despair at what is missing in signed contracts presented to us by our clients. We recommend you work with an experienced Franchise Business broker and don’t sign anything unconditionally until your lawyer has reviewed it and ensured all the strands tie together.Buying an existing franchise business is rarely as straight forward as signing and settling a Sale and Purchase of Business Agreement (S&P Agreement) with the vendor. It can be a complex and rather costly exercise involving up to four important legal contracts to review and comply with.
 
Legally, there are a number of strands that need to come together, and it is important to identify and understand these before you sign a S&P Agreement. The S&P Agreement should set out the things that need to happen (“conditions”) for the sale to proceed; and give you time to organize / complete all these steps; a reasonable period to carry out general due diligence on the business, franchisor and lease; and the option to cancel if things are not as you wish or cannot be completed. If your S&P Agreement doesn’t cover these you could find yourself with a business that you cannot effectively run, or in a dispute because you weren’t able to finalise the purchase on time (or at all).
 
The business purchase is a one off transaction. The entry into a Franchise Agreement involves a whole layer of legality and ongoing relationship to be reviewed and entered into. Note that a vendor of a franchise business normally needs prior franchisor consent to sell their business. A good franchisor will want to be involved in the process from an early stage. Often a franchisor will govern the whole process and give you (and your lawyer) clear instructions and expectations for what is required with dates, interviews, training and other requirements. Other franchisors may have very little active involvement. If there is no obvious approval or training process it could indicate an uninterested or absent franchisor.
 
A purchaser’s due diligence on a franchise business needs to focus on the Franchise Agreement and franchisor structure as much as consideration of the business itself. Often the purchaser will have to sign a new Franchise Agreement and this could be an updated version from the one the vendor signed. Ensure you see a copy of the exact Franchise Agreement you will sign, and preferably have it reviewed by a lawyer experienced in franchising before you agree to proceed. It is also very important to work with your accountant during the process of researching the business.
 
In addition to the contracts with the vendor and the franchisor, in many business purchases the purchaser takes over the Lease for premises The Lease is a legal contract under which you enter an ongoing legal relationship as a tenant with the landlord. You (or your lawyer) will have to review and approve the Lease and go through an approval process with the landlord who will need proof that you are a financially sound, suitable tenant. A Deed of Assignment has to be prepared and finalised usually involving your lawyer, the landlord’s lawyer and often the vendor’s lawyer. If the franchisor has direct rights under the lease then the franchisor and their lawyer may also become involved in the process.
 
It pays to have the lease reviewed by a lawyer who is familiar with commercial leases. They are quite different to residential leases. The rent can be reviewed (upwards) regularly, the tenant is usually responsible for all outgoings, certain maintenance, you are normally tied in to paying rent and outgoings for the whole term of the lease and cannot leave on short notice. Also in mall leases there are often clauses that require you to pay marketing fees, pay levies for mall management and services, remain open for minimum hours and pay increased rental if your turnover increases. You need to know these things before you sign.
 
For many purchasers external finance will be required. For most people this means dealing with banks. The bank will need to be satisfied that the business you are purchasing along with your ability to secure lending against existing properties or guarantees meet their current criteria – and it is no secret that in recent times banks have been cautious with business lending. It helps if the bank knows and respects the franchisor. Sometimes a refusal to fund a franchise purchase may be a warning sign that the particular franchise chain is not performing.
 
It is important that the S&P Agreement contains suitable clauses to cover all aspects of the purchase. As lawyers we often throw up our hands in despair at what is missing in signed contracts presented to us by our clients. We recommend you work with an experienced Franchise Business broker and don’t sign anything unconditionally until your lawyer has reviewed it and ensured all the strands tie together.Buying an existing franchise business is rarely as straight forward as signing and settling a Sale and Purchase of Business Agreement (S&P Agreement) with the vendor. It can be a complex and rather costly exercise involving up to four important legal contracts to review and comply with.
 
Legally, there are a number of strands that need to come together, and it is important to identify and understand these before you sign a S&P Agreement. The S&P Agreement should set out the things that need to happen (“conditions”) for the sale to proceed; and give you time to organize / complete all these steps; a reasonable period to carry out general due diligence on the business, franchisor and lease; and the option to cancel if things are not as you wish or cannot be completed. If your S&P Agreement doesn’t cover these you could find yourself with a business that you cannot effectively run, or in a dispute because you weren’t able to finalise the purchase on time (or at all).
 
The business purchase is a one off transaction. The entry into a Franchise Agreement involves a whole layer of legality and ongoing relationship to be reviewed and entered into. Note that a vendor of a franchise business normally needs prior franchisor consent to sell their business. A good franchisor will want to be involved in the process from an early stage. Often a franchisor will govern the whole process and give you (and your lawyer) clear instructions and expectations for what is required with dates, interviews, training and other requirements. Other franchisors may have very little active involvement. If there is no obvious approval or training process it could indicate an uninterested or absent franchisor.
 
A purchaser’s due diligence on a franchise business needs to focus on the Franchise Agreement and franchisor structure as much as consideration of the business itself. Often the purchaser will have to sign a new Franchise Agreement and this could be an updated version from the one the vendor signed. Ensure you see a copy of the exact Franchise Agreement you will sign, and preferably have it reviewed by a lawyer experienced in franchising before you agree to proceed. It is also very important to work with your accountant during the process of researching the business.
 
In addition to the contracts with the vendor and the franchisor, in many business purchases the purchaser takes over the Lease for premises The Lease is a legal contract under which you enter an ongoing legal relationship as a tenant with the landlord. You (or your lawyer) will have to review and approve the Lease and go through an approval process with the landlord who will need proof that you are a financially sound, suitable tenant. A Deed of Assignment has to be prepared and finalised usually involving your lawyer, the landlord’s lawyer and often the vendor’s lawyer. If the franchisor has direct rights under the lease then the franchisor and their lawyer may also become involved in the process.
 
It pays to have the lease reviewed by a lawyer who is familiar with commercial leases. They are quite different to residential leases. The rent can be reviewed (upwards) regularly, the tenant is usually responsible for all outgoings, certain maintenance, you are normally tied in to paying rent and outgoings for the whole term of the lease and cannot leave on short notice. Also in mall leases there are often clauses that require you to pay marketing fees, pay levies for mall management and services, remain open for minimum hours and pay increased rental if your turnover increases. You need to know these things before you sign.
 
For many purchasers external finance will be required. For most people this means dealing with banks. The bank will need to be satisfied that the business you are purchasing along with your ability to secure lending against existing properties or guarantees meet their current criteria – and it is no secret that in recent times banks have been cautious with business lending. It helps if the bank knows and respects the franchisor. Sometimes a refusal to fund a franchise purchase may be a warning sign that the particular franchise chain is not performing.
 
It is important that the S&P Agreement contains suitable clauses to cover all aspects of the purchase. As lawyers we often throw up our hands in despair at what is missing in signed contracts presented to us by our clients. We recommend you work with an experienced Franchise Business broker and don’t sign anything unconditionally until your lawyer has reviewed it and ensured all the strands tie together.Buying an existing franchise business is rarely as straight forward as signing and settling a Sale and Purchase of Business Agreement (S&P Agreement) with the vendor. It can be a complex and rather costly exercise involving up to four important legal contracts to review and comply with.
 
Legally, there are a number of strands that need to come together, and it is important to identify and understand these before you sign a S&P Agreement. The S&P Agreement should set out the things that need to happen (“conditions”) for the sale to proceed; and give you time to organize / complete all these steps; a reasonable period to carry out general due diligence on the business, franchisor and lease; and the option to cancel if things are not as you wish or cannot be completed. If your S&P Agreement doesn’t cover these you could find yourself with a business that you cannot effectively run, or in a dispute because you weren’t able to finalise the purchase on time (or at all).
 
The business purchase is a one off transaction. The entry into a Franchise Agreement involves a whole layer of legality and ongoing relationship to be reviewed and entered into. Note that a vendor of a franchise business normally needs prior franchisor consent to sell their business. A good franchisor will want to be involved in the process from an early stage. Often a franchisor will govern the whole process and give you (and your lawyer) clear instructions and expectations for what is required with dates, interviews, training and other requirements. Other franchisors may have very little active involvement. If there is no obvious approval or training process it could indicate an uninterested or absent franchisor.
 
A purchaser’s due diligence on a franchise business needs to focus on the Franchise Agreement and franchisor structure as much as consideration of the business itself. Often the purchaser will have to sign a new Franchise Agreement and this could be an updated version from the one the vendor signed. Ensure you see a copy of the exact Franchise Agreement you will sign, and preferably have it reviewed by a lawyer experienced in franchising before you agree to proceed. It is also very important to work with your accountant during the process of researching the business.
 
In addition to the contracts with the vendor and the franchisor, in many business purchases the purchaser takes over the Lease for premises The Lease is a legal contract under which you enter an ongoing legal relationship as a tenant with the landlord. You (or your lawyer) will have to review and approve the Lease and go through an approval process with the landlord who will need proof that you are a financially sound, suitable tenant. A Deed of Assignment has to be prepared and finalised usually involving your lawyer, the landlord’s lawyer and often the vendor’s lawyer. If the franchisor has direct rights under the lease then the franchisor and their lawyer may also become involved in the process.
 
It pays to have the lease reviewed by a lawyer who is familiar with commercial leases. They are quite different to residential leases. The rent can be reviewed (upwards) regularly, the tenant is usually responsible for all outgoings, certain maintenance, you are normally tied in to paying rent and outgoings for the whole term of the lease and cannot leave on short notice. Also in mall leases there are often clauses that require you to pay marketing fees, pay levies for mall management and services, remain open for minimum hours and pay increased rental if your turnover increases. You need to know these things before you sign.
 
For many purchasers external finance will be required. For most people this means dealing with banks. The bank will need to be satisfied that the business you are purchasing along with your ability to secure lending against existing properties or guarantees meet their current criteria – and it is no secret that in recent times banks have been cautious with business lending. It helps if the bank knows and respects the franchisor. Sometimes a refusal to fund a franchise purchase may be a warning sign that the particular franchise chain is not performing.
 
It is important that the S&P Agreement contains suitable clauses to cover all aspects of the purchase. As lawyers we often throw up our hands in despair at what is missing in signed contracts presented to us by our clients. We recommend you work with an experienced Franchise Business broker and don’t sign anything unconditionally until your lawyer has reviewed it and ensured all the strands tie together.Buying an existing franchise business is rarely as straight forward as signing and settling a Sale and Purchase of Business Agreement (S&P Agreement) with the vendor. It can be a complex and rather costly exercise involving up to four important legal contracts to review and comply with.
 
Legally, there are a number of strands that need to come together, and it is important to identify and understand these before you sign a S&P Agreement. The S&P Agreement should set out the things that need to happen (“conditions”) for the sale to proceed; and give you time to organize / complete all these steps; a reasonable period to carry out general due diligence on the business, franchisor and lease; and the option to cancel if things are not as you wish or cannot be completed. If your S&P Agreement doesn’t cover these you could find yourself with a business that you cannot effectively run, or in a dispute because you weren’t able to finalise the purchase on time (or at all).
 
The business purchase is a one off transaction. The entry into a Franchise Agreement involves a whole layer of legality and ongoing relationship to be reviewed and entered into. Note that a vendor of a franchise business normally needs prior franchisor consent to sell their business. A good franchisor will want to be involved in the process from an early stage. Often a franchisor will govern the whole process and give you (and your lawyer) clear instructions and expectations for what is required with dates, interviews, training and other requirements. Other franchisors may have very little active involvement. If there is no obvious approval or training process it could indicate an uninterested or absent franchisor.
 
A purchaser’s due diligence on a franchise business needs to focus on the Franchise Agreement and franchisor structure as much as consideration of the business itself. Often the purchaser will have to sign a new Franchise Agreement and this could be an updated version from the one the vendor signed. Ensure you see a copy of the exact Franchise Agreement you will sign, and preferably have it reviewed by a lawyer experienced in franchising before you agree to proceed. It is also very important to work with your accountant during the process of researching the business.
 
In addition to the contracts with the vendor and the franchisor, in many business purchases the purchaser takes over the Lease for premises The Lease is a legal contract under which you enter an ongoing legal relationship as a tenant with the landlord. You (or your lawyer) will have to review and approve the Lease and go through an approval process with the landlord who will need proof that you are a financially sound, suitable tenant. A Deed of Assignment has to be prepared and finalised usually involving your lawyer, the landlord’s lawyer and often the vendor’s lawyer. If the franchisor has direct rights under the lease then the franchisor and their lawyer may also become involved in the process.
 
It pays to have the lease reviewed by a lawyer who is familiar with commercial leases. They are quite different to residential leases. The rent can be reviewed (upwards) regularly, the tenant is usually responsible for all outgoings, certain maintenance, you are normally tied in to paying rent and outgoings for the whole term of the lease and cannot leave on short notice. Also in mall leases there are often clauses that require you to pay marketing fees, pay levies for mall management and services, remain open for minimum hours and pay increased rental if your turnover increases. You need to know these things before you sign.
 
For many purchasers external finance will be required. For most people this means dealing with banks. The bank will need to be satisfied that the business you are purchasing along with your ability to secure lending against existing properties or guarantees meet their current criteria – and it is no secret that in recent times banks have been cautious with business lending. It helps if the bank knows and respects the franchisor. Sometimes a refusal to fund a franchise purchase may be a warning sign that the particular franchise chain is not performing.
 
It is important that the S&P Agreement contains suitable clauses to cover all aspects of the purchase. As lawyers we often throw up our hands in despair at what is missing in signed contracts presented to us by our clients. We recommend you work with an experienced Franchise Business broker and don’t sign anything unconditionally until your lawyer has reviewed it and ensured all the strands tie together.