Business Franchise Australia 17#6 Sep/Oct 2023

Franchise Due Diligence

A Lawyers Tips on What you Need to Investigate before you Buy a Franchise

Embarking on the journey of buying a franchise is no small feat. It encompasses many important decisions; do you leave the perceived safety of your employment; do you start your own business, or do you buy a franchise, so you have a ‘Business in a Box’.

If you decide to buy a franchise; do you buy a mobile or premises-based franchise, buy into a large, well-established franchise system or a new to market franchise system. There are so many questions you need to ask yourself before you even choose your franchise. However, the decision-making doesn't end there, even after you have determined these crucial factors there are a million other questions you need to be asking before you sign up.

As franchise and business lawyers we are often contacted by disgruntled franchisees who want to leave their franchise system and one common theme always seems to be in play; they did not do adequate research before they committed. They simply went in with their eyes and minds closed.

Successful franchisees, on the other hand, prioritise their due diligence and seek expert advice right from the start. Here is a snapshot of some of the things that diligent franchisees do before they sign a franchise agreement…

they ask the right questions...

You need to ask the franchisor the right questions before you even get to the legal document stage. Don’t rush this stage, even if you are getting pushed, take time to ask key questions like:

• Is my Territory exclusive or could other franchisees or the franchisor also be able to operate within it?

• What are the minimum performance criteria and what are the repercussions of not meeting them?

• How much personal investment in terms of hours is anticipated?

• What training and support do I get from the franchisor?

• What other costs are involved (e.g., software licences, marketing fees, transfer fees and renewal fees)?

• What is the procedure if I decide to sell the business later?

Often, we find that when we report to a franchisee on the draft franchise documents, this is the first time they have considered any of these important aspects that should have already been discussed.

they do comprehensive research...

While your solicitor will assess the franchisor and its intellectual assets, it's imperative that you undertake your own investigation. The best way to get to know the franchise business is to thoroughly research the franchise system and study the disclosure document, the franchise agreement and any other documents provided by the franchisor, before you sign up.

One of the most import things you can do is to talk to some current and former franchisees to understand more about their experience within the franchise network. Their details will be provided to you by the franchisor in the disclosure document. Try and speak to any franchisees who are listed as having terminated their franchise, for obvious reasons!

You should ask them:

• if they are making as much profit as they expected;

• how much support is provided by the franchisor (including training);

• their experience with the supply of products or services;

• their experience in resolving any issues with the franchisor; and

• if they have left the franchise system – why they left.

You should also research and see what has been in the news about the franchise over the last few years and hang around outside the business you are buying to see what customer traffic is really like.

they review their pre-entry franchising documents…

Before you buy a franchise there are certain mandatory documents the franchisor must give to you which includes the franchise agreement, a disclosure document, a key facts sheets, a copy of the code of conduct and any leasing or other documents.

You should read these documents carefully to:

• truly understand what you are buying;

• understand your rights and obligations as a franchisee; and

• make a note of anything that is unclear or that you’d like to know more about so that you can ask questions.

There are certain key items in your disclosure document you should pay particular attention to like:

• all the likely costs of running your franchise;

• any legal proceedings against the franchisor, a franchisor director, associate of the franchisor or a director of an associate? Franchise territory; and

• restrictions on buying goods or services from a particular supplier or a list of nominated suppliers (including the franchisor).

For example, a good accountant will be able to help you understand the viability of the franchise and the level of investment risk that it poses.

It is particularly important to engage an experienced lawyer to properly advise you on the acquisition of the franchised business. This is a specialist area of law and needs someone who knows what is important to report on in the documents and how to explain the process and the risks, so you fully understand them.

At least 90% of the enquiries we get from franchisees wanting to terminate their franchise agreements are from people who did not engage a specialist franchise lawyer to advise them on the documents before they signed. They really had no idea what they were getting into!

As a minimum you or your lawyers should:

• examine the information the franchisor has uploaded to the new National Disclosure Register;

• conduct searches at ASIC on the franchisor;

• investigate any disclosed court proceedings against the franchisor an associate of the franchisor;

• review IP Australia’s records for information on the Intellectual Property; and

• check the ACCC website for media releases and infringement notices.

Franchising presents both enticing opportunities and inherent challenges. While the appeal of a ready-made business model is undeniable, navigating the initial stages with meticulous due diligence is paramount. By asking the right questions, undertaking thorough research, reviewing the documents, and consulting with franchise specialists, potential franchisees can make informed decisions, mitigating risks and maximising their chances of success. Always remember, it's not just about starting a business; it's about ensuring it thrives.

Helen Kay is an accomplished commercial and franchise lawyer with over two decades of expertise assisting business owners and franchisors. As the founder of Rise Legal, she specialises in providing strategic and practical commercial contract solutions. In addition to helping business owners from start-up to sale with their commercial contracts, Helen also guides individuals in purchasing franchises and assists franchisors with their setup and compliance needs. Clients can operate their businesses with the confidence that they have Helen and her team’s protection, offering a dependable legal safety net.

Helen Kay | Managing Director | Rise Legal

Offices: Gold Coast | Perth | Sydney

T: 1300 064 707

e: info@riselegal.com.au https://riselegal.com. au