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7 ways to protect yourself when you buy a franchise

Sarah Stowe

If you have been watching the news lately, you will agree that entering a franchise is often portrayed as a risky decision. This is not the case for most franchises.

As long as you do your research, understand what you’re entering into and receive the right support and assistance, buying a franchise should not be a daunting or negative experience.

Below are some steps you can take to help you protect your hard earned money, assets and livelihood when you buy a franchise.

1. Review the brand online

When you become interested in buying a franchise, it is very important to research the brand online. You should see whether there are any recent news articles, reviews or anecdotes made about the brand. If the business is likely to be high risk, there will probably be articles or comments on the internet alerting you to the dangers and the past experiences of other franchisees.

2. Seek quality legal advice

You should never rush into making a decision to buy a franchise. If you feel as though the franchisor is pushing you to make this decision as soon as possible, this may not be the opportunity for you.

Primarily, you want to feel comfortable about the details of what you are buying into and the business you will be operating for the next several years. Having a lawyer review any documents you have been provided with and advise on the terms of the arrangement is strongly encouraged. A specialist franchising lawyer will also be more likely to pick up on anything abnormal or problematic in the franchise documents which may cause issues down the track. In any case, seeking legal advice will certainly help you better understand how the arrangement is proposed to work.

3. Ensure the franchisor is compliant with the law

The government has spent significant time developing rules and regulations pertinent to franchising, and ensuring that franchisors do not abuse their power. The Franchising Code of Conduct is the primary piece of legislation where you can find these rules. It is very important to have your lawyer assess whether the franchisor is compliant with the Code. Initially, a lawyer can only assess the franchisor’s compliance by reviewing the documentation you have been provided. The Code also governs the ongoing relationship between the parties throughout the term and provides certain protection for franchisees.

4. Review any documents and financials

Under the Code, your potential franchisor is required to provide you with a disclosure document if you express interest in purchasing a franchise.

This document contains a raft of important information such as a background of the franchisor’s directors, the current franchises and corporate owned stores, intellectual property owned by the franchisor, the franchisor’s legal and financial position, the costs of establishing and operating the franchise and other important policies which will impact upon franchisees.

This is probably the sole most important document for you to review. It is also the franchisor’s responsibility to include either two years’ worth of financial reports or an independently conducted auditor’s report in the disclosure document so you can assess the financial position of the franchisor before you enter the agreement.

5. Understand whether your territory is exclusive

When you purchase a franchise, you should be clear about what location, suburbs or geographical region you are allowed to operate in. You should also establish whether this region will be exclusive to your franchise business.

If your region is not exclusive, there is a danger that another store or service provider of the same franchise will appear down the road.

While it is not uncommon for franchisors to provide non-exclusive territories, you should assess whether any other franchise in close proximity to your proposed location will affect the viability of the business opportunity.

6. Speak to other franchisees

The Disclosure Document you are provided must include a list of other franchisees in the network, and importantly franchisees who have left the network, and their contact details. It is recommended that you make contact with some franchisees and ask them about your concerns.

Of course every franchise business is going to operate differently depending on the location, the customer loyalty in that location, the prominence of competitors and other factors. Even then, other franchisees should be able to give you a general idea of what the franchisor is like to deal with and whether their businesses are living up to expectations.

7. Record any representations of promises before signing documents

Often franchisees suffer without remedy when they enquire about certain aspects of the business and rely on what they are told by their franchisor. If a franchisor fails to uphold that promise and the parties get involved in a dispute, the franchisee’s memory is unlikely to be sufficient evidence that the promise was made.

Therefore, if a franchisor makes representations such as the amount of turnover you can expect, you should write this down.

There is also a section in most franchise Agreements where you can write down any representations you relied on when deciding to purchase the franchise. These representations should be written into this document.

Hopefully the above information will assist you in purchasing your franchise. Remember, it is also your duty to understand your own responsibilities in running a franchise. Care and diligence in understanding these responsibilities will help you avoid a breach of your franchise agreement once you are operating the business.