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.
- 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
- Do the products and services cater for ongoing client needs? Are they just a novelty or do they cater for seasonal demands?
- Are the products and services protected by patents, registered designs, trademarks or copyright?
- What is the existing and potential competition?
- What are the projected sales and profits and how are they determined?
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?
- 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.
- Read the Australian Competition and Consumer Commission's franchisee manual to help you assess franchise business opportunities.
- Read about buying an existing business if buying a franchise does not seem right for you.
- Find out how to work with experienced business advisers.
- Learn how to calculate profit margins.
- Read about staff awards and wages.