10 things to research before you buy a franchise

Buying a franchise can be an exciting and rewarding experience. Buying a franchise can also be a big financial step and a major lifestyle change. Make sure you are ready for the thrills and the spills by doing your homework before signing on the dotted line.

1. Assess your skills, strengths and weaknesses

Not everyone is suited to franchising and not every franchise business will be your cup of tea. Franchising offers the opportunity to be your own boss with the support and security of an established business model. However, being part of a franchise means you have to play by the rules of the system. At last count, there were about 1160 franchise businesses operating in Australia, which means there is ample opportunity to choose a format which suits you best.

2. Complete a pre-entry franchise education program

The words of wisdom we often hear from established franchisees is that it pays to ‘go in with your eyes wide open’. A pre-entry franchise education program can help. Griffith University offers a free online education program for prospective franchisees.

The program, funded by the ACCC, educates potential franchisees about their rights under the mandatory Franchising Code of Conduct as well as the practical side of running a franchise business. You can sign up here.

3. Get professional advice

Before investing your savings in a franchise opportunity, seek independent advice from a lawyer, business adviser or an accountant. This will save you a lot of angst further down the track. In fact, the Code requires you to provide a statement that you have sought this advice. Alternatively, you can sign a statement saying that you are aware that you should seek advice but have decided against it.

4. Get the documents

Make sure you receive an information statement, disclosure document, franchise agreement and a copy of the Code.

It is important that you carefully review documents provided to you. These documents not only set out your rights and obligations but they will also give you key information to follow up.

An information statement is a two-page document highlighting some of the risks and rewards of franchising. You should receive an information statement when you apply, or express an interest, in buying a franchise.

A disclosure document contains key financial information and details about the system. You should read this document closely as it covers things like franchise territory, online sales, site selection, payments and what will happen when the agreement comes to an end.

If you decide to become a franchisee, the franchisor must provide you with a disclosure document, as well as the franchise agreement and a copy of the Code at least 14 days before you enter into an agreement or make a non-refundable payment.

The franchise agreement (contract) underpins each party’s rights and responsibilities. When signed, the agreement becomes a legally binding contract between the franchisee and the franchisor.

5. Document your meetings

Take comprehensive notes of your meetings with the franchisor. Insist on the franchisor confirming any claims it makes in writing

Don’t rely on purely verbal claims from a franchisor. Make sure the franchisor puts any claims in writing so you can verify them. For example, if the franchisor talks about estimated earnings, insist that they put the figures on paper and ask for details on how they made the projections. This will enable your accountant or business adviser to crunch the numbers and verify the calculations.

6. Speak to current and previous franchisees

You should speak to as many existing and former franchisees as possible. They will provide you with the low down on how the franchise system works and whether they are satisfied with the level of support provided by the franchisor.

Franchisors are required to provide you with the contact details of current franchisees as well as franchisees who have left the system in the past three years. If possible, see if you can work with an existing franchisee so that you are able to see how the business operates first hand, including turnover and staffing requirements.

7. Research the franchise

Try to verify the information provided to you. Leave no stone unturned.

Has the franchisor been involved in any recent court action? What sort of track record does the franchise management have? What else is happening in the industry? What are the demographics and spending habits of consumers within your area?

8. Check your lease

If you will occupy premises as part of your franchise, make sure you understand your rights and obligations under the lease or occupancy agreement.

Lease agreements can be contentious. Check whether the term of your retail lease corresponds with the term of your franchise agreement. For example, it may not be ideal to have a five-year lease but only a three-year franchise agreement.

9. Check clauses

Check the clauses on termination, renewal, end of term and transfer of the franchise, and make sure you are willing to accept them.

Sometimes it pays to start at the end. A franchisor doesn’t have to extend your agreement or enter into a new agreement. However, it does have to provide you with written notice of its decision not to offer you a new agreement at least six months before the end of your current agreement. The Code also spells out conditions around termination of the agreement.

10. Get the best deal

If the deal isn’t acceptable, try to negotiate a better offer or look for a better deal.

Be prepared to walk away if you are not completely satisfied with the information you have. And, be prepared to run the other way when someone claims you can make large amounts of money quickly and with little effort!

The ACCC enforces the Competition and Consumer Act 2010, which includes the mandatory Franchising Code of Conduct.

Originally published by, Dr Michael Schaper at Franchise Business (franchisebusiness.com.au) , on 3 December, 2015

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