6 steps to set up a franchised business
There are six simple steps to follow if you’re planning to buy a franchise, write Luke McKavanagh and Peter Rouse of Rouse Lawyers.
Step 1 - Research
There are many franchise systems to choose from. A franchise is a long-term commitment. Ensure you do thorough research and due diligence before you decide on a system. Get as much information and as many figures as you can. You don’t need a business degree to run a franchise, but it is recommended that you do some online courses to understand the basics of business management.
Step 2 - Structure
Getting your business structure correct from the beginning is essential. Find a commercial lawyer and an experienced accountant. They will assess your situation and advise on the best entity structure to use to operate your business. Your accountant will carefully examine the figures you’ve been given by the franchisor.
There are many different types and combinations of structures:
- Sole Trader
- Trust (discretionary, unit or hybrid)
The best structure for you will depend on who will be actively involved in the business and how you wish to protect your personal assets. Each structure has its own taxation consequences. What is right for one person is not necessarily right for another. Don’t assume that because a family member had a company that you need one too.
If you choose a trust and a company, your advisors will register your company and set up your trust. If you have business partners then having a partnership, shareholders or other governance agreement is good practice to outline the relationship of the stakeholders involved, including (without limitation) what happens if you wish to buy out a partner or sell your share or interest in the future.
Step 3 - Finance
Unless you have sufficient assets to fund your new venture, you will need to apply for finance. This will take several weeks. Be prepared for your financier to ask for a personal guarantee. This means that if your entity can’t meet a loan repayment, then the financier can have recourse against your personal assets.
Step 4 - Australian Business Number
Your accountant will need to apply for an ABN for your entity and register it for GST.
Step 5 - Read everything
Carefully read all the documents given by the franchisor. Make a list of questions to discuss with your lawyer and accountant. They may seem silly to you, but these questions are often a prompt for your advisor. Don’t assume your advisors understand the ins and outs of the franchise model – explain it to them.
Make sure the franchise documents cover everything you are expecting. A ‘gentleman’s agreement’ may sound good at the time, but trying to enforce this in the future can be problematic.
Step 6 - Don’t rush
Double check with your advisors before you sign anything. Make sure you’re comfortable with your enquiries and the franchise documents before you proceed. Buying a business is a huge commitment. Make sure you can see yourself in the business each day and that you’ll be happy doing that.