Buying A Franchise
Small business remains the powerhouse of the Australian economy, providing the great majority of employment opportunities.
Underlying this strength is the desire of many Australians to own a business and be their own boss.
Starting and growing a business is a challenging task and, for many, operating a franchise business can offer major benefits.
The advantages of owning a franchise business include:
- Brand recognition
- Marketing programs managed by the franchisor
- Training provided by the franchisor
- Location chosen by the franchisor on the basis of market research
- Tried and proven business system
In assessing a franchise opportunity, the first thing to ensure is that documentation complies with the legislated Code of Conduct.
The Code of Conduct provides for self-regulation in the sector and covers marketing guidelines, franchise territory, materials and supplies, franchisor and franchisee obligations, and situations under which the franchise agreement can be terminated.
In March, 2008, changes to the code to strengthen protection of the interests of franchisees took effect.
They require the franchisor to provide the franchisee with a copy of the code of conduct, business disclosure document, franchise agreement and any other agreements, such as a confidentiality arrangement or leasing deal, at least 14 days before agreements are signed or money changes hands.
They also require a franchisor to disclose in writing information relevant to the franchise business within 14 days of learning of it; ban waiver agreements that favour a franchisor; and forbid a franchisor from inducing a franchisee or prospective franchisee not to associate with like persons.
It is important in buying a franchise to ensure that there are no impediments to leaving the business and that the agreement provides for right of sale to a third party, even if subject to the franchisor’s approval of the incoming franchisee.
In acquiring a franchise, it is not necessary to acquire a new business.
There are also opportunities to purchase existing franchise businesses, which come onto the market for any of a range of reasons.
A franchisee may have been highly successful and be seeking to capitalise on that success or the business may have been a dud.
While the price will include a goodwill consideration, an existing business offers the buyer significant advantages – not the least of which are an established clientele and suppliers, immediate cashflow and experienced staff.
Commercial premises are often subject to ‘full repair’ leases, which make the tenant responsible for upkeep of the property, while plant and equipment may represent a very significant investment.
Acquiring a new or an established franchise may require a substantial investment and should not be undertaken without legal advice.