As a business model, franchising has been subject to a lot of bad press in recent months. Currently, the Federal Parliament is conducting an inquiry into the effectiveness of the Franchising Code of Conduct (Code), the third such inquiry in less than a decade.
So why would you consider purchasing a franchised business at a time like this? The alternatives are to purchase an existing independent business or set up your own.
Operating under a recognised brand as opposed to establishing your own, is an obvious advantage.
This article looks at what, other than the brand, are the advantages of a franchised business over going independent.
One of the biggest reasons for seriously considering purchasing a franchised business is the volume and type of information that must be given to you by the franchisor and/or which is generally available to assist you.
So let’s look at the options.
Documents you must get when you buy an independent business
In Victoria and South Australia, there is legislation which requires vendors of small businesses to provide a vendor’s disclosure statement to the prospective purchaser. In Victoria, this applies where the sale price is $450,000 or less. In South Australia, the sale price is only $300,000 or less.
The statement is a due diligence guide for a purchaser and sets out the financial performance of the business over the last two years in Victoria and three years in South Australia. In Victoria, the statement must also provide the financial performance for the current financial year up to the most recent quarter.
If a properly completed statement is not provided to the purchaser, the purchaser can withdraw from the purchase contract within three months after signing the contract right up until settlement.
There is no legal requirement to provide such vendor statements in the other states or territories of Australia.
Where applicable, the retail leases legislation in each state and territory prescribe that a Landlord’s Disclosure Statement must be provided by the landlord, usually seven or 14 days, before the tenant enters into the lease. Where the lease is being assigned to the purchaser in VIC, NSW, QLD, ACT and NT, there are requirements for the vendor tenant to provide Assignor’s Disclosure Statement to the purchaser.
The requirements to give a vendor statement and leasing disclosure statements apply irrespective of whether the business is an independent or franchised business.
Of course there are other types of information that any buyer should be seeking, but no other documentation is mandatory if the business is not a franchise.
Documents you must get when you buy a franchise business
There are additional types of information that you can access as a prospective purchaser of a franchised business.
The Code requires that the franchisor provide you with certain documents at least 14 days before you enter into a franchise agreement: an information statement, a disclosure document and a notice stating whether the site or territory has been franchised in the last 10 years and if so, the circumstances under which it ceased to exist.
In addition, franchisors are required to obtain a statement from you as to whether or not you obtained legal, accounting or business advice, and if you did not, that you were advised to obtain such advice but decided not to do so.
A franchisor’s disclosure document contains a significant amount of information about the franchisor, its directors and associated entities, the intellectual property of the franchise system, any litigation relating to the franchisor, your rights inside and outside the territory (if applicable), the franchising history of the site or territory, the fees payable under the franchise agreement, and importantly, the anticipated capital, costs and expenses required to commence and continue operating the franchised business.
This sort of information is not readily available if you purchase an independent business.
What other resources are available to franchise buyers?
In addition, there are valuable resources available for anyone considering purchasing a franchised business.
There are free online franchising courses available, including at https://www.franchise-ed.org.au/online-courses/pre-entry-franchise-education/
The ACCC has a Franchisee Manual available at https://www.accc.gov.au/system/files/919_The%20franchisee%20manual_FA4.pdf
In addition, the ACCC’s Franchisor Manual may also help you to assess whether or not your franchisor is complying with its obligations – https://www.accc.gov.au/publications/franchisor-compliance-manual/the-franchisor-compliance-manual
Doing more research
It is important to have some knowledge of your target market and of the demographics within the local area before purchasing any business. Many franchisors undertake demographics analysis to assist in determining their territories and where to locate a site. If you ask, they might make such information available to you, saving you having to obtain such information yourself.
A franchised business, in theory, operates on the basis of a proven business system. The business system and day-to-day operational aspects of the business are usually documented in detailed operational manuals. Such manuals are likely to contain information and policies on daily operations, occupational health and safety, food handling, anti-bullying, anti-discrimination, employment policies, which give significant guidance for a new business owner.
A diligent franchisor provides significant and ongoing support in all aspects of the business, including training and that is an enormous advantage over being independent.
Put simply, it is access to information, proven systems and documentation and availability of support that are the main reasons you would consider purchasing a franchised business within the system of a diligent franchisor, instead of purchasing or establishing a business on your own.
Understanding and evaluating the information prior to purchase is just the first challenge and can take months. Obtaining advice from an accountant and a lawyer who are experienced in franchising is key.
Talking to current and former franchisees of the system is also important.
Once the decision is made, diligent compliance with the franchisor’s systems and manuals and all applicable laws is critical.
However, while there is significant benefit in the information, the proven system, the manuals, the policies, the established brand, just like an independent business, the responsibility for the success of the business rests with you.
Surrounding yourself with experienced legal, accounting and business advisors, successful franchisees in your network and other networks, asking questions, listening, reading relevant material and constantly learning will be the means by which you give yourself the best chance of success.