Seek professional advice
Franchising is a well-developed business model in the Australian market. In fact, Australia is often claimed to be the most franchised country in the world. In the last decade alone, the number of franchise systems offering business opportunities in Australia has almost doubled, presenting a prospective investor with a double-edged sword.
On the one hand, the maturity of the franchise market offers some confidence in its ability to reduce the risk of entering an unknown business market with a new venture. On the other hand, the mere number of options and the range of the quality of the franchise systems available (from ‘cowboys’ to ‘corporates’) create a hard task of choosing the one franchise in which to invest.
It helps if you seek professional advice. In fact, a genuinely professional franchisor will insist you obtain independent legal, accounting and business advice before you sign the franchise agreement.
The lawyer’s role
In Australia, most commercial lawyers are able to review and advise a client in relation to all the documents and processes involved in a franchise purchase. However, there are fewer who have sufficient commercial experience in franchising to enable them to offer a meaningful comparative assessment of the fairness or otherwise of the franchisor’s proposed commercial terms.
This is where franchise lawyers (who are simply commercial lawyers with significant franchising experience) can offer added value to the investor client.
The role of the franchise lawyer in this process is to encourage and assist in conducting thorough due diligence of the franchisor, the vendor (if buying an established franchise business), the business system and the client himself or herself, to ensure the right business is married to the right person.
There are, of course, obligatory non-legal matters one should consider before buying a franchise. The Franchise Council of Australia suggests that potential franchisees should do the following:
- Assess your own reasons for wanting to own a business
- Assess the lifestyle and income implications of owning and operating a business
- Assess the franchise opportunities consistent with points one and two above
- Build your understanding of the franchise relationship
- Narrow your franchise search to a few systems, then request further information
- If appropriate, and you are comfortable with the decision, select a system and commence the application process
- Ensure you have adequate borrowing capacity, including working capital, to successfully establish this type of business
- Be sure you receive and evaluate all disclosure material during the application process
- Be sure you receive legal and accounting advice from lawyers and accountants with franchise experience before making any final commitment
- Use the cooling-off period to check your facts and figures and determine if you still want to proceed
Engaging a franchise lawyer
When you engage a franchise lawyer to assess a proposed franchise offer(s), the lawyer will assist you through the acquisition process ensuring that:
- You are well informed about the proposed terms of the franchise, including your and the franchisor’s obligations
- You are aware of the various legal and business risks
- You are informed about the associated risks and obligations, such as leases of premises and equipment, and any employee entitlements carried over with the business from the vendor to you
- You are equipped to negotiate and secure the best possible outcome
- Your legal and financing structures are set up in the most tax effective way with consideration for asset protection
You may find your lawyer’s advice in relation to a particular franchise results in you not buying the franchise business in question. Rather than being a waste of money with no ascertainable benefit, the cost of the initial advice may well have save you hundreds of thousands of dollars in a misguided or misdirected investment.
-Written by Ilya Furman, Franchise Legal