Franchising has, for many years, been an attractive option for business purchasers as it offers an increased degree of security. Potential franchisees look for big brand names, which are well established in the market, have a great reputation, and a system that works, all while eliminating the headache of starting a business from scratch.
However, before signing on the dotted line, thorough due diligence must be undertaken. This includes review of all financial data and documentation presented by the franchisor and, if applicable, current franchisee of the business, as well as all other data available about the franchisor and the franchise system.
It is recommended that the following questions be asked and answered as a starting point:
1. What is the total investment required, upfront and on-going?
Both the franchise agreement and the disclosure document should list all the current and potential costs payable up-front and during the term of the franchise. An assistance from an accountant should be sought to help with creation of budgets and forecasts. Further, financial requirements, including required borrowings, must be discussed with a banker to know how much you can afford without overstretching to avoid any potential financial difficulties in the future.
2. What is the perception of the franchise system in the market place?
You should search all the information available on line and in print media in order to ascertain the perception of the franchisor in the market place, any bad publicity and any current litigation on foot.
3. How long has franchisor and its directors been in business?
The franchisor’s history and business standing may be vital to your decision to invest in a particular system. As for individuals behind the franchisor, running the day to day operations, they should have some business experience in this and other businesses in a similar industry. Some of this information can be found in the disclosure document as well as in the company search of the franchisor.
4. What is the track record of the business location?
Depending on where the business premises of the franchised business are located, it may make or break a business. Try to find data in relation to the location of the business you are interested in buying, including rent, outgoings and foot traffic. Other important information is whether there is a plan by the franchisor or the landlord to relocate the business in the near future, or even worse, expansion plan by the landlord which may potentially either divert foot traffic away from your future business or place a competitor in close proximity.
5. Can you follow the rules?
If you cannot follow the system, including the directions, policies and procedures of the franchisor, then franchising is definitely not for you. One of the essential elements of why franchising has worked for many businesses is because a particular set of rules is applied to all involved.
You can never do too much research when it comes to buying a business, franchised or otherwise.
6. What is your current family situation and life style and will the chosen business fit in with my life?
Careful consideration must be placed on whether a particular business you have chosen to purchase suits your current family situation and the life style. In the event that it does not, you will need to discuss the business requirements, including your time commitment, with your loved ones and make a choice.
7. Who owns the intellectual property of the franchise system and is it legally protected?
If you are expected to pay money for a brand, then you want such brand to have all the required legal protection, by way of registered trade mark(s), and in some cases, registered designs and patents. Often in franchise systems, the franchisor entity is not the owner of intellectual property. The owner is usually a related entity of the franchisor, which is set up for the sole purpose of holding all intellectual property assets and thus protecting the brand if the franchisor entity falls over.
8. Have you done all the required research?
You can never do too much research when it comes to buying a business, franchised or otherwise. Undertaking searches of the internet, ASIC, IP Australia, ACCC, court registers, domain registers, etc. are vital in verifying information provided by the franchisor in the disclosure document as well as finding other relevant information. One of the best sources of information about the franchisor is the current and past franchisees. Try to speak with as many as you can. Most of their contact details will be listed in the disclosure document.
9. Are your franchise agreement and your lease aligned?
Both a franchise agreement and a lease are contracts in their own rights. However, in most cases their terms are not aligned, especially their duration. You do not want to be in a position when you are left with a lease and no business to run (once your franchise agreement expires) or vice versa, a franchise agreement on foot and no premises to run the business from.
Think carefully before you make any business decision and consult with professionals who have experience in franchising, including a franchise lawyer and a franchise accountant. However, once you decide on a purchase of a particular franchised business, then be prepared to follow the system and put in the hard work to make it profitable.
First published June 2015.