HOW TO BUY A FOOD FRANCHISE

Hungry to invest in a food franchise? Before you bite into this sector, use our easy guide to check out what you need to do to buy yourself a business. T o get it right when you sign up to a franchise you’ll need to take certain preparatory steps. And if you’re choosing a food service business model, there are some industry-specific elements to consider. But don’t worry, we’ve made the job easy.

RESEARCH

“I see a lot of people who buy a particular franchise because they love the product or service being delivered – they are a customer and think ‘this food is fantastic’ (assuming it’s a food business) and they imagine they would love to be selling this to customers themselves,” writes Corinne Attard.

“Now, having a great in-demand product is not the only thing to think about. Many restaurants and fast-food places (‘quick service restaurants’ being the industry term) sell delicious food so this is just the first and most obvious requirement.

“Here are my key steps to buying a food franchise.” counting the customers and estimating their average spend – you can then get a realistic idea of sales. You may need to repeat this over different days.

Survey the customers Ask the customers about the service they receive, the product and how often they buy from the business.

Collect data Get some hard data on specific items such as your occupancy cost (rent and outgoings as a percentage of sales) and your cost of goods sold (COGS). These ratios are percentages you can then use to compare across systems and specific businesses.

STEP 1. RESEARCH, RESEARCH, RESEARCH Due diligence is spoken about a lot but what does it involve? You need as much information as possible about the way the business operates and what is going to be involved. The franchisor is one source of information but you need to speak to current and previous franchisees to assess their experience of running this business and obtain the answers you need. For a food business some specific suggestions are:

Count the customers Try to do a transaction count of the business or one very similar in the network. This means sitting in the business over the day and Check the supply chain Find out from the franchisor which suppliers you can use for the various ingredients (e.g. soft drinks, coffee, milk, cleaning products) and packaging you’ll need in the business. If you can, find out what prices are charged to franchisees. How does this compare to other suppliers? Make some phone calls to find out. It is a fact of life in franchising that the supplier chosen by the franchisor may not be the cheapest, so ask why if this is the case.

You may be told it is because the franchisor wants to be assured of consistency across the system so a national supplier is preferred; or it could be because the supplier is a related entity to the franchisor, or that there is a rebate or other incentive being paid to the franchisor or into marketing. These are very

MEET THE EXPERTS These franchise experts know what it takes to be well prepared to invest in a business where food is front and centre.

LEGAL Corinne Attard, Holman Webb Lawyers Corinne is a commercial lawyer with more than 25 years franchising and retail industry experience including as in-house counsel with oversight of more than 350 franchised food outlets. Named as one of the top franchise and business lawyers in Australia annually since 2014 in International Who’s Who of Business Lawyers, Corinne has also been included in Best Lawyers 2019 and 2020.

common reasons and not a reason on their own to reject a system. It is the overall cost to the business compared to the sales generated (and your other expenses) that is critical.

If you are comfortable with the overall level of COGS (that the gross profit margin is sufficient) then prices of particular supplies may be of less importance. If you consider that the supplies are unreasonably inflated compared with similar brands or an independent operation, then walk away and find an alternative.

Investigate labour costs Find out how wages are determined (award or workplace agreement) and what is the level of staff costs you can reasonably expect.

Check fitout and equipment costs How often will you need to refit the premises and what is the likely cost? Can you lease some equipment? What finance options are available?

Assess the competition Analyse the market both locally and nationally. Some food categories such as chicken have brands that are very similar; have you considered these alternatives?

Look at brand lifespan How sustainable is the demand for your products or this brand? Is it a passing fad or something that will continue to be in demand by consumers long term? The advantage of riding a wave will be forgotten when your signature item is no longer in fashion and the customers have disappeared. Is this a brand or business in growth mode or is it declining?

Evaluate delivery options Are you expected to provide delivery or use a third-party delivery supplier such as Uber Eats? If so, how will this affect your profit margin? How do deliveries compare to takeaway and dine-in? Find out which is more profitable.

Understand the leasing situation Who holds the lease: the franchisor or franchisee? There are

pros and cons to both but however it is structured you will be liable for the rent.

STEP 2. Read all the documents You will receive a large bundle of documentation (franchise agreement, disclosure document, lease and other documents) but don’t skip reading them. Note or highlight things you don’t understand or need more information about. Ask to receive the documents as early as possible; drafts or template documents if the final ones will not be ready for a while.

STEP 3. Obtain expert advice You must get good advice from professionals who have experience in these types of businesses and franchising. This should include accounting and legal advice about the documents, but also consider a leasing consultant if you need to find your own location and negotiate a lease, especially if the franchisor does not offer this expertise. General business advice about finance and business planning may be available from your accountant or you may need to find someone else with this experience. You need to understand and plan for your eventual exit, such as through sale, and understand how to achieve your objectives.

STEP 4. Sign only when you are ready Never be rushed into anything. It’s a big decision and reputable franchisors want you to be comfortable and they want to make sure you are committed. There are a lot of franchises in the market so be prepared to walk away if you feel pressured.

STEP 5. Second thoughts? If you do have buyer’s remorse despite taking these steps or there is a sudden change in circumstances you can use the seven-day cooling off period if you have already signed, but if that has passed and is not available, speak to your franchisor. They may have a solution to help you either stay in your new business or to exit.

LEASING Phillip Chapman, Lease1 Phillip is one of Australia’s leading retail industry experts with a specialist focus on the leasing challenges and opportunities faced by tenants in the retail sector. He is the founder and director of Lease1, an authority on retailer leasing, that provides a tenant-only representation service.

OPERATIONS Anthony Stahl and Daniel Mesiti, Boost Juice Multi-unit, multi-award winning franchisees Anthony Stahl and Daniel Mesiti are old hands in the hospitality world. The pair have been franchisees since 2005 and have notched up more than 27 awards. But before running a number of successful Boost Juice franchises the business partners had set up and operated their own cafes.

CHECK THE LEASE “By the time a franchise buyer has sifted through the franchise application, purchase contract and franchise disclosures they can be overloaded with information,” writes Philip Chapman.

“And that’s when important steps in assessing and reviewing lease documents are missed. But leaving the lease to others and assuming everything is fine is like playing Russian roulette with your future livelihood. “If things go wrong and your defence is ’I d idn’t realise’ or ’n o one told me’ it isn’t going to solve the problem. “If you think about the process of buying a retail business as the mix to bake a cake then investing in a food franchise is a recipe for a multi-layered gateau.

“First-time franchisees are faced with a long ingredient list but not necessarily a clear set of instructions. So where do you start?

“I recommend starting with the lease, as without premises to trade from the rest doesn’t come in to the mix.”

UNDERSTAND THE LEASE The landlord’s disclosure statement is a formal document designed to set out all the essential terms of the lease and the shopping centre or property.

But it’s important not to confuse this with the mandatory franchisor’s disclosure document – you will need to see the landlord’s disclosure statement, too.

The landlord’s disclosure statement must be reasonably fresh, no more than 12 months old as the information needs to be current and relevant, and the basis from which to start asking questions.

The other important question before you start is: will the lease to be held by you or the franchisor?

If you will hold the lease then the current lease will need to be assigned to you. The seller, or the holder of the lease, is responsible for the application to the landlord. But beware there are requirements to be met which means more paperwork and set time frames to be taken into account.

However, if the lease is to be held by the franchisor then you will need a license agreement approved by the landlord to give you the right to operate the business in the premises.

On the page opposite is a sample of the items you need to be across when purchasing a food franchise.

7 SIMPLE LEASING TRAPS AND HOW TO AVOID THEM

In the lease disclosure statement apart from the key essential items such as term, rent, annual reviews, etc. you need to be across the following important items.

1. LICENSED AREAS Areas such as seating and storage need to be clearly acknowledged and identified. Find out if the licensed seating is on a footpath controlled by council. If it is, you need to ensure you have the relevant license, the annual license fees and the term of the license in comparison to the lease. CAUTION! These seating areas may form a large part of generating the sales of the business, so imagine the effect if the council did not renew the license and the seating was removed?

2. PERMITTED USE Does the current range of products clearly fall under the permitted use? Are there charges to the permitted use you are seeking to make? CAUTION! One of the biggest causes of disputes and food business failures is the duplication of product offering in the future, so find out what the intentions are if you don’t have exclusive rights.

3. APPROVAL Now this is an area that gets overlooked, particularly outside of shopping centres. Is the premises zoned for this type of business, and does the premises meet all the statutory approvals for health, fire and food services? CAUTION! If the zoning is incorrect the business is at risk of being shut down.

4. FUTURE REDEVELOPMENT The landlord disclosure statement should advise if there are any current development applications and you should make further enquiries here. Look for relocation and demolition clauses in the lease and understand how these may affect you in the future. CAUTION! A redevelopment you’re not expecting can be disastrous – foot traffic is diverted and trade disrupted.

5. REFURBISHMENT Does the lease require the tenant to refurbish the premises during the lease? What are the make good requirements at the end of the lease? CAUTION! Franchisees can be caught out by refurbishment or make good costs.

6. TRADING HOURS If the business model includes afterhours trading, are you permitted to do so and are there any additional costs to consider? CAUTION! A great location can turn out to be disastrous if the opening hours limit key trading times.

7. CODES OF CONDUCT Find out if the landlord adheres to the Casual Mall Licensing and Sales Reporting Codes of Conduct. You need to know whether you have any rights if a pop-up is located next to you by a competitor. Will you be required to report sales figures to the landlord and do the figures they have match the data provided by the vendor or franchisor? CAUTION! Pop-up stores and kiosks are part of mainstream retailing now but can damage a store’s trading capacity.

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OPERATIONS

8 hot-shot tips from foodie franchisees Anthony Stahl and Daniel Mesiti own five Boost Juice franchises. Here are their best tips on what to consider before you buy a food franchise.

1. BE READY FOR BOOT-CAMP Make sure you enjoy working with food. It’s simple but important. Working with food means always being on the go, from constant prep to continual cleaning, so make sure you go in with your eyes open.

And cleaning will be a big part of your job! Dishwashers and cleaning equipment, sanitiser and detergents, mops and buckets go hand in hand with the food industry. Expect to get dirty. New franchisees we have trained in the past have often shed many kilos within the first few months. Understand that if you’re coming from a corporate role or retail fashion environment, your lifestyle is about to change. Expect 12,000-plus steps per day. It does mean you save at the gym though!

2. CHECK THE DETAILS You’ll also need to understand food safety … preparation, storage, allergens, stock control. These are all things that will require attention every single day. You will need a level of detail orientation to keep on top of this.

3. UNDERSTAND THE BUSINESS Where are the sales coming from and what time of day is the store busy? Food is a battle of margins, so you need to know how profitable the categories are.

Find out how delivery impacts on margins. Uber takes up to 35 per cent and can be more than 50 per cent of revenue for some businesses.

You’ll need to know how much labour is required. This will be one of your top two highest expenses along with the cost of goods sold (COGS). This is influenced by when the business trades and when it is actually busy. Food business often involves lots of preparation and food handling and these can be at times when your business may not be trading, so how does this affect your labour costs? Can you open early or close late to help drive sales?

Do you understand the production process and stress points in delivering great food quickly?

Get to know the cash flow and weekly wages required.

4. EQUIP YOURSELF Food equipment costs can be considerable. Setting-up costs – kitchens, grease traps, cooling equipment, ice machines, plumbing and fitouts – can add up quickly. So know your numbers.

Search online to find typical prices and check the quality before you purchase either new or used equipment. It’s important to consider where the equipment is made and assembled and how easy and costly it is to access servicing and parts.

5. UNDERSTAND THE CUSTOMERS It's actually important to get along with and like serving your customers, particularly at the start when you should be heavily involved. Get to know what they are looking for and be the backbone of the operation.

Think about how you will market to them. What promotional strategies will they respond to? How will you build loyalty? For your customers, what is more important: speed, quality or convenience?

6. BE A GREAT TEAM LEADER Understand the team required to deliver this. The ability to lead a great team is absolutely essential and will make all the difference to your business.

7. PREPARE FOR THE LIFESTYLE Consider the impact of business ownership on your lifestyle, family and friends. The food industry is notorious for long hours that are not family-friendly. Any business owner can feel isolated but add the food service hours involved and this can be amplified. Be aware of this and have a strategy to deal with it.

8. CHASE THE DREAM Get out there and find something you think you could purchase or replicate. Walk the streets in your target area and talk to owners and business brokers. Be proactive in chasing what aligns with your goals of owning a food business. n

Making Franchise Law Black and White

Unravelling the Knot

With the increasing regulation of franchising, and impending changes to the Franchising Code of Conduct and current review of the unfair contract laws likely to add to the protection and rights of franchisees and their employees, there is a commensurate increase in the risk of being tied up in legal disputes between franchisors and franchisees that are difficult to unravel.

Our commercial litigation and dispute resolution legal team, who have many years of specialist franchising law expertise, and have acted in over 50 franchise dispute mediations in the last three years, employ strategies for clients to manage conflict risks and resolve disputes as quickly as possible with the best possible outcomes. Do not remain tied up with legal disputes. Seek advice early to avoid a protracted legal dispute.

Our focus is to deliver high quality legal services of real value to our clients.