Rules and regulations are at the heart of franchising, so it really pays to seek good advice before you buy into a franchise.
Before you buy into a franchise, a lot of due diligence is required. Many legalities are involved, so to best protect yourself it pays to consider working through issues with a specialist lawyer.
Here are five things you should consider about seeking legal advice for a franchise purchase…
1. Seek legal advice
It’s quite simple. Homebuyers would not go ahead with their purchase without the involvement of a lawyer to handle the legal issues and paperwork. It should be the same with a franchise. In many cases, investing in a franchise is a significant financial commitment, so why take a risk? In fact, seeking legal advice is thought to be such a vital stage of the franchise purchase that the Franchising Code of Conduct now requires a franchise buyer to indicate to franchisors whether or not they have sought legal advice.
2. Hire a franchise lawyer
There is one very good reason to employ an experienced franchise lawyer – he or she will understand the nuances of clauses in a franchise agreement, the document that shapes the relationship between franchisee and franchisor, and the running of the franchise itself.
A generalist lawyer who is new to the franchising sector can follow what is set out in the Franchising Code of Conduct but will not be familiar with past court cases, precedents and commonalities across the sector. An inexperienced lawyer might miss elements that would be warning signs to a lawyer immersed in franchising; equally, a franchise expert won’t waste time (and therefore money) questioning standard clauses.
3. Do your own research
There’s no doubt expert legal advice is invaluable when buying a franchise, but leaving all the knowledge and understanding in the laps of the lawyers limits franchise buyers. Lawyers can offer clarity and insight into the complexities of the franchise agreement and other relevant documents, but there is no substitute for having a personal understanding of the legals and a grasp of what is required as a franchisee.
4. Protecting the business
Legal advice can, of course, extend beyond the obvious minimal reviewing of franchise documents. Franchisees might need advice about asset protection and personal guarantees, about business structure, about tax, privacy law or consumer law. And, of course, the issues of employment law are top-of-mind right now.
5. Be prepared to pay
An online study last year showed that 54 per cent of surveyed franchisees had either avoided consulting a lawyer altogether or sought free advice. As part of the buying process, franchisees spent on average just $2500 on their due diligence.
The report was produced by the Asia-Pacific Centre for Franchising Excellence at Griffith University and the University of New South Wales, and the authors were concerned about the lack of investment in expert analysis: “This low spend on pre-purchase professional advice while conducting due diligence implies a rather cavalier approach,” they surmised.
Good advice will cost, but it may save significant money in the long run if things do not go according to plan with the franchise – or it can prevent a franchisee buying into a dud business model.