Things to Know Before Buying a Franchise
Understanding Franchising
Buying a franchise can be a significant investment and comes with its own unique set of challenges and considerations. When you buy a franchise, you are buying a business model. Here’s what you need to know before diving into the world of franchising in Australia. When you purchase a franchise in Australia, you are buying a proven business system as well as brand recognition. Franchising is a popular business model in this country. Consider and give careful thought to our tips, written for people who are considering buying into a franchised business model.
Franchise Disclosure Document
Franchisors must provide a disclosure document at least 14 days before you enter into a franchise agreement.
This document is detailed and contains crucial information about the franchise. It must be carefully reviewed. The disclosure statement is a very detailed document it includes items such as financial details, estimated setup and ongoing costs, any fees payable to the franchisor (like royalties, turnover fees, and marketing contributions), and what financial statements of the franchisor are available. It outlines the business history of the franchisor, including the length of time the franchisor has operated, details of the franchise network, and any changes in ownership or management.
The document also discloses any litigation history, such as past or current legal proceedings involving the franchisor or its directors, which could signal potential risks or reputational issues. Lastly, it sets out your termination rights the circumstances under which either party may end the franchise agreement and any associated consequences, such as post-termination restrictions or fees. Understanding these sections is essential to making an informed decision and protecting your interests.
Legal Considerations for Franchises in Australia
Franchising Code of Conduct
The Franchising Code of Conduct, which is administered by the Australian Competition and Consumer Commission (ACCC), is a mandatory industry code that applies to all franchise agreements. The ACCC ensures that franchisors and franchisees comply with the Code. The Code aims to regulate the conduct of franchising participants. It is important to familiarise yourself with the Code to understand your rights and obligations.
Franchise Agreement
The franchise agreement is the legal contract between you and the franchisor. It outlines the terms and conditions of the franchise relationship, including fees, territory, duration, renewal rights, and exit strategies. For instance, the agreement will stipulate an initial franchise fee, any ongoing royalties, and marketing fees as well as identifying what territory you can operate in. As expert commercial lawyers, Lord Commercial can review this agreement advise you of your rights and obligations as well as identifying any unfavourable terms or potential red flags.
Financial Considerations for Buying a Franchise
Initial and Ongoing Costs
Franchising may require a significant upfront financial commitment as well as ongoing fees. You must assess your financial capacity and ensure you clearly understand all costs involved. A thorough personal financial plan is essential.
Financing Your Franchise
Securing financing for a franchise can be challenging. However, there are various funding options available, such as bank loans, personal savings, or franchisor financing programs. Bank loans are a common choice, but some franchisors also offer financing programs to help potential franchisees get started. You should prepare a detailed business plan and financial projections to present to potential lenders.
Profitability and Return on Investment
Analyse the franchise’s potential profitability. Review typical sales figures and profit margins. Speaking with current and former franchisees is important and can also provide insights into not only the business’s performance but whether the franchisor is helpful and committed to assisting a franchisee. Calculate the expected return on investment (ROI) and ensure it aligns with your financial goals.
Operational Considerations for Franchise Owners
Training and Support
One key benefit of franchising is the access to comprehensive training and ongoing support. The franchisor must be committed to providing adequate initial training to help you understand the business operations. Ongoing support, including marketing assistance, product development, and operational guidance, should be readily available and is crucial for your long-term success.
Territory and Exclusivity
Understand the territory rights granted by the franchise agreement. In a franchise context, ‘territory’ refers to the geographical area where you will operate your franchise. It’s important to know whether you have exclusivity rights in your territory, which means that the franchisor will not open another franchise in the same area. This is essential to protect your investment from internal competition and overlapping markets.
Exit Strategy
How long is the franchise agreement for? Are there options for further terms. If you do decide to sell, what is the process and does the franchisor charge a fee?
Conclusion
Buying a franchise in Australia can be a rewarding venture if approached with careful planning and due diligence. Understanding the legal, financial, and operational aspects is crucial for making an informed decision. Seek professional advice, conduct thorough research, and ensure the franchise aligns with your business goals and financial capacity. With the proper preparation, franchising can offer a pathway to entrepreneurial success in Australia.
For assistance in preparing to purchase a franchise, or more information to help you get started, contact our team of experienced commercial lawyers in Melbourne at (03) 9600 0162 or via email at info@lordlaw.com.au.
