Want to buy a franchise? Why it pays to read the small print
As a franchise buyer, you might feel like you’re drowning in documentation. At a minimum, you’ll receive a franchise agreement and disclosure document from the franchisor, and if the franchise operates from a fixed site, lease documents as well.
If you’re buying an existing franchise business, there will be sale documents too.
It might seem easier to bury your head in the sand and simply sign away – but be cautious, you could be signing your life away.
5 reasons why you need read the small print
Here are my top five suggestions for why you should study the fine print - or pay someone to read it for you.
1. Nail the numbers
Perhaps one of the most important questions on your mind as a franchise buyer is how much it will cost you. Secondly, you’ll want to know how much you can expect to make, and when you can start to see a profit.
These questions can largely be answered by checking:
- What fees are payable under the franchise agreement?
- What are the estimated established costs and ongoing costs listed in the disclosure document?
- What rent, outgoings and other costs are payable under the lease?
- If you’re buying an existing business: are there accrued employee entitlements, what is the purchase price and does the business owe any money to suppliers or creditors?
It’s a great idea to then take these numbers and conduct your own projections with your financial advisor so you can get a clear financial picture of the franchise opportunity.
2. Due diligence
Seeing as you’ll most likely be in the franchise for the long-term, with many franchises having five to 10 year terms, you need to know who you’re getting involved with.
The disclosure document provided to you by the franchisor is a fantastic resource for you to conduct your due diligence. This will contain information about the franchisor and its directors’ business experience, details of past and existing franchisees (who you can contact) and details of whether the franchisor has been involved in any litigation.
Overall, the disclosure document provides a handy snapshot of the franchisor and the franchise opportunity and should not be ignored.
3. Know your rights
Being well-informed about your rights will help you make a success out of the franchise opportunity. For example, what support can you expect to receive from the franchisor during the term of the franchise? What protections do you have under the Franchising Code of Conduct? What can you do if you have a disagreement with the franchisor?
All these things will be detailed in the franchise documents, equipping you to make the most out of the franchise relationship.
4. Know your obligations
On the flip side, you must also know your obligations under the Franchise Agreement. Remember, you are buying into an existing brand and system and so will need to play by the rules.
Just some of the key obligations you need to be aware of include those relating to:
- Customer service
- Brand guidelines
- Supply arrangements
- Reporting requirements
The consequences of not complying with your obligations can be disastrous. While the Franchising Code allows for an opportunity for breaches of the franchise agreement to be remedied, if you fail to completely remedy the breaches on time, you could stand to lose the entire business.
5. Work out an exit strategy
Lastly, reading the small print will give you an idea of how you can ultimately exit the business.
It is most common for franchisees to sell the business to another franchisee in order to recoup their investment. Allowing thefranchise agreement to simply expire (or even worse, be terminated) could see you walking away with nothing.
In working out your exit strategy, it’s important to consider any restraint of trade clauses in the franchise agreement. These may limit you from operating a similar business for a period of time after the end of the franchise agreement, so you will need to think about your long-term goals before signing anything.