Professional Advice when Buying a Franchise

THINKING OF BUYING A FRANCHISE? WHAT ARE YOU REALLY BUYING?

How Professional Advisors Can Help You Make The Right Decision.

 

So you've decided to take control of your own destiny, to be your own boss, to work for yourself but not by yourself!

Congratulations, you are about to join the growing ranks of franchise business owners. But before you sign on the dotted line there are a number of issues you need to be aware of.

The latest National Bank Survey of Franchising found that almost ¼ of franchise systems had experienced disputes between the franchisor and franchisees. Franchise disputes (like most disputes) are often due to a lack of common understanding. If you can clarify what your personal expectations are and if you can ensure that these are equivalent to what the franchisor anticipates delivering then you are well on the way to a successful relationship.

 

Franchising is in its simplest terms, the licensing to one person (you - the franchisee) of the right to run a business using another persons (the franchisor) brand and systems and with that other persons assistance and support.

It has been described as the cloning of a successful business.

 

While you should receive a high level of support and advice from the franchisor (like having a head office) along with an established reputation and brand power that a small business cannot normally achieve on it's own, there are a number of fundamental features of franchising that may not be commonly known.

There will be a purchase price plus ongoing payments to the Franchisor.

There is normally a specified location or territory - it is rare to be granted the right to trade on an unrestricted geographical basis.

There is probably a set term, i.e a specified number of years which may include renewal periods. Because there is a term there will be an end to the right to run the business. It is not an outright purchase of the business.

There will probably be a restriction on the franchisee running a similar business for a period of time after their franchise has ended.

The franchisee may have the right to sell the franchise during the term, but if you stay in the franchise until the term ends, the right to run the business reverts to the franchisor, and there is no payment made to you.

There will be many and varied obligations and standards the franchisee must follow which on one hand help the franchisee to run the business efficiently, but on the other can seem onerous. Although you are working in your own business, there is in a way, still a "boss" who may have the final say on how you run the business.

The Franchise Agreement.

The signing of the franchise agreement should only take place after all discussions, negotiations and professional advice have occurred. You should however be given an agreement to review at an early stage once you have indicated a genuine interest to the franchisor. After all, this is the record of everything you have agreed to. It is very much in your interest to know exactly what it means! If you are serious about proceeding, you need to see a lawyer and an accountant, preferably with experience in franchising. To follow are some of the questions you need to ask and issues you need to be satisfied with. A professional advisor can assist with your understanding.

The Agreement may seem one sided in favour of the franchisor. This is to ensure the franchise system has uniformity and that there are controls to deal with defaulting franchisees who could easily damage the reputation of the whole brand and franchise system. In reality, we hope that these controls are never called upon.

 

o        Lease of Premises - this will often be regulated by the Agreement. Some franchisors will have the lease assigned to them at termination. This enables them to carry on or selling the business that you have built up and prevents you from setting up in competition. The Franchisor will want to make it difficult for franchisee to compete in any way after termination. 

o        Franchisor Support – what has been committed to in writing in terms of start up assistance and ongoing advice? It is a common complaint by franchisees that the franchisor is not supporting them. However, if there is no valid commitment to do so, the franchisee may be expecting an unrealistic level of hand holding.

o        Intellectual property – franchisor needs to ensure trademarks and patents are registered in every country they are trading or likely to trade in. The Franchisor should have a stated commitment to continue to grow the brand.

o        Web Sites and emails. These days a franchise agreement should specify what your rights or restrictions are regarding set up and operation of web sites using the brand name. Also be aware that sales through the internet by the franchisor or other franchisees really transcend any physical territory you may have been granted.

 

The claims and undertakings made by the franchisor prior to your purchase of the franchise must not be misleading. You should be able to rely on what you are told (or not told as the case may be). If there is any uncertainty about the franchisor's obligations or the likely success of the business get it in writing. If it is important enough for you to rely on, it is important enough to be in the Agreement (remember - that document that records everything you have agreed to).

 

General Legal Business Issues

Being in business can be very onerous with all the compliance required and that’s just for a sole trader with a simple business. Employing staff involves a whole extra level of responsibility – PAYE, fringe benefit tax, fair treatment, performance issues.

 

There is no specific legislation governing franchising in New Zealand however normal business and commercial laws apply.

 

If you are in business, you need to be familiar with the Consumer Guarantees Act; Fair Trading Act; Employment Legislation; Commerce Act; Local Authority regulations; health and safety; duties as a company director, tax obligations and so on.

 

Will the franchisor cover these areas in training or manuals? If not, you have a lot to learn and to keep up to date with. Your lawyer can guide you here. There are also many good books and other publications available from bookshops, employers organizations or the relevant government departments.

 

Seeing Professional Advisors - Lawyer, Accountant, Insurance Advisor

It is worth seeking out and seeing specialist advisors, they will spend time on the important things and be more aware of what is acceptable and normal in franchising.

Ask for quotes or estimates. A lawyer for example may charge from a few $100 to a few $1000.00 to assess a franchise agreement for you depending on how well known the system is and what your specific issues are. If you don't know what you are meant to ask - tell the advisor and they will give you a general background. If you only want advice on specific key points - ask for it. Never assume they will point out the obvious to you, they don't know your level of knowledge or experience.

 

Other Sources of Advice:

Franchise Association of New Zealand. (If a franchisor belongs to the Association it is a fair indication that they are aware of their legal and moral obligations to franchisees).

Banks - most major banks have a specialist franchise division.

Franchise NZ Magazine and other business and franchising magazines.

 

In Summary

At the end of the day you have to make your own decisions. Don't let an advisor talk you out of something you have a gut feeling is right - similarly don't overlook good advice because your enthusiasm has you wearing rose coloured glasses.    If you are a potential franchisee and the advisor suggests negotiating changes to the agreement yet the franchisor will not budge it is o.k to proceed on the clear understanding that you are aware of the issues and are prepared to live with them. If you have any doubt about the way you will feel about things in the future – think very carefully before proceeding.