Importance of advice when buying a franchise

Corporate & Commercial 7 December 2018

The purchase or establishment of a business can be an exciting opportunity, however the wrong decision at the outset can have drastic consequences, both financial and personal.  Whilst buying a new or established business will usually involve significant financial cost and personal commitment, undertaking a thorough due diligence and ensuring expert advice is obtained can help you to understand the risks involved.

The purchase of a franchise is intended to be the acquisition of a known ‘brand’ or ‘system’ however, this does not guarantee the franchised business will be profitable.  Thorough due diligence and expert advice is extremely important and should cover all aspects of the franchise.  This applies to both the purchase of a new franchised business from a franchisor or an established franchised business from an existing franchisee.

Under the ACCC regulated Franchising Code of Conduct, it is mandatory for prospective franchisees to be provided with an Information Statement and for the franchisor to recommend they obtain independent legal advice, independent financial advice and independent business advice.  Despite this, many franchisees proceed with entering into contracts for the purchase of a franchise and franchise agreements without obtaining such advice.  Most franchise agreements have a minimum term which a franchisee must commit to, with fees (including royalties and rental) and other obligations to apply during the term.   As such, even if it becomes apparent to a franchisee that the franchised business they have bought is not what they expected or is unprofitable, a franchisee is unlikely to be able to simply ‘walk away’ from the franchised business without significant cost.

Prospective franchisees should ensure that they obtain advice from an independent accountant in relation to the franchised business, including having their accountant conduct a thorough analysis of the current business financials and any financial information provided by the franchisor, prior to committing to the franchise agreement or to any contract for the purchase of the franchised business.  Engaging an experienced accountant will ensure all relevant financial documentation and information is provided and the financial position of the franchised business, or of the income and expenditure likely for a new franchised business can be thoroughly assessed.  This advice can help to reduce the risk of a franchisee committing to a franchise for 5 years or more, where, for example the financial information available suggests the franchised business is unlikely to make a profit or is likely to be financially unviable.

Prospective franchisees should also ensure they obtain legal advice in relation to the obligations under the franchise agreement, including the risks of entering into the franchise.  Franchise agreements are often long and complex and a lawyer experienced in the area of franchising can assist to point out any unusual or onerous terms, as well as the obligations which will apply both during the term and upon termination.  Legal advice should be obtained at the earliest possible opportunity and prior to entering into any contract for the purchase of an existing franchised business.

Whilst obtaining expert advice from lawyers, accountants and business advisors comes at a financial cost, this advice is crucial to allow a prospective franchisee to make an informed decision and ensure they do not commit to a franchise which is not suited to them or is unlikely to be profitable in all the circumstances.

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