Franchisees.
Buying a franchise can be a great way to get into business for yourself. It eliminates much of the uncertainty and risk of a traditional start-up. However, it’s also important to remember that purchasing a franchise business comes with specific obligations and expectations set by the franchisor that you must meet. Conducting thorough due diligence will assist you with the decision to proceed with the purchase or not. We recommend taking the time to have the franchise agreement and associated documents thoroughly reviewed by an experienced franchise law specialist. As a potential franchisee, we will help you review this agreement thoroughly, making sure you understand everything before signing on the dotted line.
Buying A Successful Franchise.
The success of a franchise business is largely dependent upon the involvement and business experience of a franchisor who is committed to the system’s success and who is financially sound and of good reputation. You can improve your chances of buying a successful franchise, by asking the franchisor some important questions before deciding to proceed.
Did the franchisor personally operate an outlet (as a pilot) before it commenced franchising?
If so, the franchisor will understand the day to day operation of the business better and the frustrations that franchisees may have. The details of the pilot scheme will also give you an indication of how successful it was and you should ask to see the financials. Franchisors who have previously run their own outlets can find it initially difficult to switch into the role of supporting and assisting franchisees. You should ask the franchisor what they can offer you that other franchisors do not offer.
Does the franchisor have any other franchisees?
Consider reaching out to a number of existing franchisees to discuss their experiences and performance to date and obtain their feedback about the franchisor.
Has a franchisee ever failed?
If a franchisee has failed you should ask why it failed. If possible, speak to both the franchisee and franchisor about this. Also ask the franchisor if they have bought back a franchise that was failing before it actually fell over.
Does the franchisor provide financial projections?
Disputes often arise from financial projections and it is important that you ask the franchisor what assumptions the projections are based on. Be wary of financial projections given by the franchisor for other existing operations which are in a busier location than the intended location that you will operate from. You should ask to see actual accounts which confirm the franchisors financial projections and ensure that they are relevant to the proposed territory or site.
What support does the franchisor give you?
The support of the franchisor and adequate training by the franchisor of its franchisees is crucial for the ongoing success of the system. Your enquiries should include asking whether the franchisor will work with you in the franchise after the sale and if so, for how long. You should also find out what continuing training the franchisor will provide and how much this will cost.
What advertising initiatives are there and how are they paid for?
Advertising and marketing is essential to any franchise system. The franchisee will be expected to pay a percentage of its revenue to the franchisor as a marketing fee. Details of this fee and how it is to be spent are important information to consider. In terms of the advertising itself, how are marketing and advertising decided upon and what input do you get? Is the marketing and advertising appropriate to the customers that you are trying to attract?
The above are a sample of questions you may wish to ask a franchisor.
Here To Help.
The Commercial Law Team at Davenports Law has extensive experience in all aspects of franchise law. We know that the foundation of any successful franchise is the relationship between the franchisor and the franchisee. The terms of that relationship are established in the franchise agreement, a 40-80 page contract covering a wide range of legal topics. Learn more in our article 10 Tips For Buying A Franchise.
If you are looking at buying a franchise, contact one of our experienced commercial lawyers.