Blog

Franchising provides a compelling opportunity for enthusiastic entrepreneurs who wish to operate their own business but are cautious about commencing a venture entirely from the beginning. Usually, Franchisees will have their brand and marketing arranged by the Franchisor. Additionally, franchisees will receive training and marketing assistance as part of the package. The presented opportunity is enticing and acquiring this sort of a business can offer substantial rewards, prompting franchisees to overlook the potential drawbacks and potential risks associated with this deal. 

This article explores aspects often overlooked and neglected by franchisees when acquiring a business. 

Assuming you will be in full control and failure to understanding the franchisor has the decisive control

Franchisees commonly acquire a franchise business with the expectation of being independent decision-makers and having control over the day-to-day operations of the business. Understand that a franchise is like operating on a license and while Franchisees might have relative control of the business, a franchise will have a business model which franchisees are required to adhere to. 

Franchise businesses may limit the freedom of franchisees to modify their business operations, even if the franchisees believe that their proposed changes could lead to increased profitability and productivity compared to the franchisor’s established practices. This lack of flexibility can hinder entrepreneurial exploration and adventurous decision-making that business owners typically desire.

Deviating from the franchisor’s guidelines, whether it involves pricing, decor, product selection, or other elements, poses the risk of invalidating your legal agreement/ Franchise Agreement which might lead to the Franchisee losing their franchised business.   

It is key to appreciate that Purchasing a franchise is suitable for individuals who value and comprehend the critical significance of adhering strictly to established and proven procedures.

Failure to Secure Adequate Legal Counsel

Entering into a franchise agreement without a comprehensive grasp of its terms and conditions poses a potential risk. It is crucial to engage legal counsel for a thorough review of all franchise documents (Franchise Agreements, Disclosure Documents, Lease Agreements, etc.) 

Through review of legal documents unfavourable clauses can be pinpointed and signal the need to revisit the negotiation table with the Franchisor in order to secure more advantageous terms. 

Choosing a legal representative with sufficient expertise is paramount to understanding and navigating the legal complexities involved in such agreements to obtain a comprehensive explanation for any sections that you find challenging to comprehend. 

Through obtaining legal counsel, this will also ensure the desired Franchise business fully complies with all relevant laws and regulations. Particularly that the legal documents presented comply with Competition and Consumer (Industry Codes—Franchising) Regulation 2014.  

Insufficient research

It is crucial to delve into various lines of inquiry before making any conclusive commitment. Understand the Franchisor is also in a business and it is advantageous to them for you to purchase their franchised Business as they will make money through you. 

Avoid accepting the franchisor’s assurances, understand the outwards appearance presented by the Franchisor may not be what you expect and this is an investment you are making hence it is not to be made thoughtlessly. Rather, enquire about the Franchisors brand through reaching out to existing franchisees to understand if the Franchisor/Franchisee relationship aligns with your goals and expectations.

It is beneficial to possess industry-specific knowledge when considering the purchase of a business. To minimise risk, consider acquiring a company within an industry you have expertise in. In cases where you lack familiarity with the industry, dedicate time to educate yourself about it thoroughly before proceeding with the purchase of a business.

Not making an exit strategy

Every relationship will inevitably conclude, and for a Franchisee, it is essential to proactively formulate an exit strategy. This preparation is vital to prevent any potential disadvantages. The following are some for the few areas of concern; 

Restraint of Trade

Typically, Franchisors incorporate restraint clauses, imposing specific periods and geographic limitations that may hinder your engagement in similar businesses post-exit. Such clauses might restrict Franchisee’s career opportunities post-exit thus the need to ensure an alternative career path different from the Franchised business. They are not always enforceable – check with your lawyers to understand more.

Termination of Franchise and Lease agreements

If you find yourself needing to terminate your lease or franchise agreement before its scheduled end date, or if you wish to conclude your contract prematurely, be aware that additional expenses may accrue beyond your initial losses. It is essential to develop a comprehensive plan that considers factors such as loan repayment, outstanding rent, and any other applicable franchise fees. You franchising solicitor will be able to assist you with this.

Overpaying for the Business

Assessing the fair market value of a business involves a detailed analysis of various factors, making it a complex process that requires careful consideration, including but not limited to;

• company’s financials; 
• assets, intellectual property; 
• market conditions; 
• growth potential; and
• industry trends

Paying more than necessary for a business is a frequent error that can result in financial stress and diminished profitability, as a Franchisee It is crucial to refrain from hastily acquiring a business without assessing whether the price is fair. Engaging a professional to conduct a thorough overview before finalising any agreement is essential.

Conclusion

Purchasing a business can be profitable if conducted correctly. It is essential to engage a professional in areas which you are not versed with, this includes engaging legal counsel to review legal documents and accountants to discuss the financials of the deal. 

Think of the aspects listed above which are often overlooked and neglected by franchisees when acquiring a business. Ask yourself, have you sought or conducted adequate research about the business? Are you paying a fair price for the business? Do you have an exit strategy? Have you been given adequate legal advice? Do you understand that Franchisor has overall control of the business? Do you understand your obligations as the franchisee? And do you possess industry-specific knowledge of the business?

If you need legal assistance regarding the purchase of a Franchise in Australia, contact our legal team. Call use today on 1300 612 663 or visit our contact us page.