Assessing franchise opportunities

Before you buy into a franchise, carefully consider all the legal, financial and business implications. Answering the following questions with your accountant, lawyer or business adviser will help guide your decision of whether to buy a franchise.

The franchisor

  • How long has the franchise business been established and what is its reputation?
  • Who owns the franchising organisation and what is their record?
  • Are they members of the Franchise Council of Australia?
  • Are they aware of and fully compliant with the mandatory Franchising Code of Conduct?
  • How robust and successful is the franchise system?
  • What active support does the franchisor provide in terms of training, purchasing, choosing a location, marketing and advertising?

The franchise product or service

The franchise agreement

  • Has the franchisor provided disclosure documents in accordance with the mandatory Franchising Code of Conduct?
  • What is the term of the franchise?
  • Is there an option to renew? If so, are there any restrictions? What additional fees are payable?
  • Does the franchise refer to a territory? Can others operate in your territory or poach your clients?
  • Is there a requirement to sell a minimum amount of products and services to keep operating the franchise?
  • Can you sell the franchise to someone else? If so, are there any restrictions?
  • Can you continue in the same business after selling the franchise or following its termination?
  • Can the franchisor terminate the franchise? If so, under what conditions?
  • Is a royalty or commission payable to the franchisor?
  • How much must be paid up front? What do you get for this? What are the conditions?
  • How much is the ongoing franchise fee? Are there other fees for advertising or training?
  • What impact does GST have on the franchise fees?

The franchise business premises

  • Does the franchising agreement include the leasing of business premises?
  • Who holds the lease over the premises, you or the franchisor?
  • Can the lease be terminated while you continue to hold the rights to the franchise?
  • What are your rights and obligations under the lease agreement?
  • Who owns the fit-out and other inclusions in the leased premises?

Financial considerations

  • Apart from the cost of the franchise itself, what will be the cost of buildings, plant and equipment, fixtures, fittings and stock?
  • Is the product and equipment being offered at a fair market value?
  • Have you considered the best way to structure your business for tax and legal purposes (e.g. a company, partnership, sole trader or trust?)
  • Do your estimates of wage costs take into account holiday entitlements, overtime payments, the need to cover absent staff and superannuation obligations?
  • Have all overhead costs been included in your financial calculations?
  • Will the business provide you with a fair return on your capital outlay, your personal effort and risk?

Before you decide

  • Are you satisfied with the projected cash flows? Try to be realistic, not optimistic.
  • If possible, seek the views of at least 3 existing franchise owners about the specific franchise system you are interested in purchasing.

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