Stewart Germann

ensure your franchIse purchase Is affordable

Franchising as a method of marketing goods and services is exciting and there are many business opportunities available.

It is essential for any prospective franchisee to look carefully at a business opportunity which involves carrying out due diligence. Purchasing a new Franchise system and being one of the first six franchisees is often exciting, however, great care must be taken. Trending franchises which may be appealing are often is in the fitness industry and food. For fitness, the choice is extensive – consider Anytime Fitness, Snap Fitness, F45, 9-Round. Another area is laser skin clinics and a robust system is Australian Skin Clinic. Once a franchisee has identified a particular business to buy then he or she should consult with an accountant and an experienced franchising lawyer. The choice of businesses available is huge – for example, you could purchase a full format business franchise system like Coffee Club or Domino’s Pizza, or you could purchase a franchise service like Jim’s Mowing or VIP Home Services. Whatever system you want to purchase, you must ensure that you can afford the purchase price which would include goodwill, plant fittings and fixtures, and the stock for an existing business. If you elect to purchase a greenfields opportunity then you will have to pay the upfront franchise fee to the franchisor and those fees differ considerably from $5,000 or $10,000 for a service franchise to $50,000 for a full business format franchise.

process

The usual process starts with executing a confidentiality agreement. If you are buying an existing business through a business broker you will be provided with an information memorandum. Whatever you purchase, make sure you can afford the total purchase price including having a working capital provision to cover upfront lease rental payments, legal and accounting fees and money in the bank to get you through the first three months.

Stewart Germann founded Stewart Germann Law Office (SGL) in 1993 as a boutique law firm at Auckland, New Zealand, specialising in franchising, licensing and business law. Stewart has over 40 years’ experience in franchising law and acts for franchisors in New Zealand, Australia, USA and the UK. SGL also act for franchisees and provides legal advice. Stewart has spoken at franchising conferences in New Zealand, Australia, Italy, South Korea and USA and he was on the Board of the Supplier Forum of the International Franchise Association (“IFA”) for 6 years until March 2007. Email: stewart@germann.co.nz | Web: www.germann.co.nz

Most of the banks are used to franchises, especially Westpac and ANZ. With very well-known and successful systems, banks are happy to provide finance subject to a satisfactory assets and liabilities statement from the prospective franchisee and cashflow forecasts. It is good to borrow from a bank when purchasing a franchise as that will ensure an ongoing commitment and discipline with the bank in relation to repayments; but don’t over-extend yourself. There is nothing worse than feeling pressured to pay creditors with no buffer. Banks will usually require loans for franchising repaid within five years so your forecasting must build that time frame into account. any business. Of course, due regard must be given to any specific legal requirements of the franchise system. For example, if you were purchase a business involving food there are strict regulations in relation to food hygiene and food management. An important point to note in regard to today’s world of multi-communications is you must always be aware of the power of social media, and especially Facebook. Franchising is well understood and reliable in both New Zealand and Australia. It covers a wide range of industry categories and subsectors like retail trade, accommodation and food services, and administration and support services. “ Whatever system you want to purchase, you must ensure that you can afford the purchase price which would include goodwill, plant fittings and fixtures, and the stock for an existing business.” Franchise agreement

The key legal document is the franchise agreement. Many clauses which are usually included in the agreement include the following: • Grant of franchise • Term of the franchise • Rights of renewal of term • Obligation to pay royalties and advertising fees to the franchisor

• Minimum performance criteria • Good faith obligations on the part of a franchisee and the franchisor

• Not to prejudice the franchisor’s intellectual property • Customer database and privacy • Customer complaints • Franchisor’s obligation to conduct extensive training • Franchisor’s obligation to provide the manuals which should include the operating manual and health and safety manuals

• Dispute resolution recommending mediation Unlike New Zealand, Australia is more regulated with a mandatory disclosure regime. Prospective franchisees can place full reliance on the disclosure document and its contents. Therefore, all statements and representations made by a franchisor must be true and able to be substantiated. To go into franchising, the message is clear – do your homework by way of due diligence, ask the right questions of a franchisor, have a bank behind you which provides necessary finance, and obtain expert accounting, taxation and legal advice. A monetary investment in the due diligence process is essential as you need to know what you are getting into and what your continuing obligations are. However, above all – do not over-extend yourself by paying too much for a franchised business when you really cannot afford. v