Top six ways to minimise risk as a franchisee

Sarah Stowe

Reduce your risks as a franchisee. Image: gcar.netEntering into a franchise agreement is a long-term commitment, and making wrong decisions can affect your bank balance, health and your relationships, write Janice Bywaters and Luke McKavanagh.

Before you sign on the dotted line, and throughout the course of the business relationship with your franchisor, there are some important steps to take to minimise your risk.

1. Do your due diligence and don’t rush

Firstly, ask yourself whether you are cut out to run not just a business, but a franchised business where you must strictly follow the system stipulated by the franchisor.

If you are opening a franchised business at a greenfield site (and even when purchasing an existing business) then you need to ensure that you have sufficient capital to start a business and survive the losses you may incur while you build it until it is established. This may involve ensuring you have the capability to raise finance and being prepared to put your assets at risk.

Choose the right franchise system. Whilst you may have your heart set on a particular franchise, there are many good systems to pick from, and they should all be investigated. This involves asking the questions:

  • What is the franchisor’s business background and experience?
  • How long has the system been in operation?
  • How many franchisees are there?
  • How many franchisees have started, sold or ceased to operate within the past year?
  • How extensive is the training provided?
  • What are the fees, both upfront and ongoing?
  • What support does the franchisor provide in exchange for your fees?

Before you sign the franchise agreement the franchisor is required to provide you with a disclosure document, which should provide answers to many of these questions.

A key part of this disclosure document will be contact details for existing and former franchisees. You should contact as many current franchisees as you can to find out whether they are happy with the system.

Don’t just contact franchisees recommended by the franchisor. Former franchisees should also be contacted to find out why they left. 

The more investigations you make the more comfortable you will feel. Remember, don’t sign the franchise agreement until you are happy with everything. Don’t feel you need to rush to make the next training date or because someone else is interested in the area. Take your time and proceed at your own pace.  

2. Choose the right structure

A lawyer and an accountant will help you choose the right structure for your business. Whether you enter into the franchise as a sole trader, partnership, company or trust, making the right decision from the outset is essential. Each structure is different and the most suitable structure will depend solely on your circumstances.

The best attitude to have is to expect the best but to plan for the worst. Investing in the right structure in the beginning can limit your liability and risk to your personal assets if the business is unsuccessful, or maybe help with tax minimisation when the business is successful. Each structure has different taxation consequences.

3. Record promises

Never rely on a promise or representation regarding the potential for the business without first undertaking your own research and investigations. If the franchisor makes a promise about something which is not specified within the franchise agreement or the disclosure document, make sure this is recorded in writing.

It is common when entering into a franchise agreement that a prior representations deed is also signed, prompting you to answer questions about any promises you are relying on.

4. Communicate with the franchisor

Remember that franchising in itself is not a business – it is a system of doing business. The franchisor has a proven system for success and has opted to duplicate that system by franchising. This means you must comply with the franchisor’s way of doing things.

Don’t assume that just because it is your business that you can run it the way you want.

If the franchise agreement restricts the products or services you can offer, or the colour scheme and layout for your store, then you must comply with those restrictions. This often includes getting the franchisor’s prior approval before you make any changes to your business.

Remember, always get this approval in writing.

5. Adhere to time limits

If your franchise agreement provides you the option to renew for a further term, then diarise the time limits. The time frames to exercise your option are strict. If you miss the time frame, then the franchisor has no obligation to grant you the option.

Also, don’t forget about the time frame to exercise the option under your lease. You don’t want to renew your franchise agreement but have no store to operate from.

If you receive a breach notice from your franchisor, act on it immediately. Whether it is paying your outstanding fees or speaking to your lawyer about your options, non-compliance within the time frame under a breach notice may entitle your franchisor to terminate the franchise agreement.

6. Optimise your own efforts

A franchised business is not a guarantee for success, and you must still:        

  • Follow the franchisor’s system
  • Not expect the franchisor to do everything
  • Recognise your own abilities and deficiencies 
  • Work hard in the business

Janice Bywaters is special counsel and Luke McKavanagh a lawyer at Rouse Lawyers