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04 October 2017
by Patrick Learmonth
QUESTIONS WHEN BUYING A FRANCHISED BUSINESS

Buying a franchise business is often an attractive opportunity to own your own business and be your own boss. There are many franchises New Zealand involved in many sectors of business – service, hospitality et cetera. And many of these businesses are very successful but franchising creates a complex business relationship and one which needs to be understood and carefully investigated before buying a franchised business. The relationship between the franchisor and franchisee and their respective rights under the franchise agreement are all heavily weighted in favour of the franchisor.

There are no laws in New Zealand specific to franchising so in considering buying a franchised business a prospective purchaser needs to carry out a very careful and in-depth investigation of the business, the franchising franchise agreement and take good advice from professionals qualified in the franchising area – lawyers and accountants who regularly practice in franchising.

Prospective franchisees should consider the following questions and carry out investigations to answer them:

About the franchisor:

  • Who is the franchisor, who are the people behind the franchise and who are the members of the senior management team? What is their experience and reputation in franchising?
  • Is the franchisor a local law and international franchisor or a local master franchisor?
  • What is the reputation of the franchisor amongst franchisees and the business community generally?
  • Is the franchisor involved in any other (competing) franchises and does the franchisor itself operate any franchisor owned outlets?
  • Is the franchisor a member of the Franchise Association of New Zealand?

The franchise business:

  • How long has the franchise been in existence in New Zealand?
  • How many franchised outlets/franchisees exist?
  • What is the general reputation of the franchise amongst franchisees and business community?
  • What sort of turnover/ costs/ profit levels to franchisees have in this franchise?
  • What competition is there for the franchise from other businesses?

Your investment:

  • How much do you actually have to pay to become a franchisee – this includes all payments to the franchisor, any amounts payable to landlords, all legal and accounting costs and, where you are buying an existing franchise, how much are you paying to the seller?
  • Do the projected returns and the past performance of the franchise show that you will earn the income you expect and return on the amount you are investing in purchasing this franchised business?

What you pay as a franchisee:

  • What are the sort of fees that are charged by the franchisor under the franchise agreement? These fees can include royalties, advertising contributions, administration costs, transfer costs, software costs.
  • Are you required to purchase products and services from the franchisor under the franchise agreement and if so at what price and how do those prices compare to others in the market?

What is the franchisor provide:

  • Does the franchisor provide ongoing training and assistance? You should discuss this with other franchisees as to levels of training and assistance available.
  • What product and material supplies come from the franchisor and are you able to substitute from other suppliers? Does the franchisor assist with arranging premises, insurance, fit out, computer systems, trade supplies et cetera?
  • Does the franchisor provide you with customer opportunities and contracts?

The franchise agreement:

  • How easy is to understand? Have you been provided with a copy of a disclosure document for the franchise setting out key facts and as required by the franchise Association of New Zealand (if the franchise or as a member)?
  • Have you had proper professional advice from an accountant and a lawyer specialising in franchising as to the franchise and the terms of the franchise agreement?
  • Have you talked to other franchisees as to their experience including talking to former franchisees as to their experiences?
  • Do you have to provide a personal guarantee of the terms of the franchise agreement and/or any security to the franchisor or your payment obligations under the franchise agreement or any premises lease e.g. rent bond or deposit account for purchases?

How do you exit the franchise?:

  • Can you sell the franchised business when you choose?
  • What happens if you become unwell or a partner dies and you cannot continue to operate the business?
  • Does the franchise or have a right to purchase the business at the end of the franchise term or during the term and if so at what value and on what terms?
  • What happens if the franchise is terminated by the franchisor – what ongoing liabilities do you have in our you are entitled to any compensation?

Territory:

  • Does your franchise apply to a limited territory?
  • You have exclusive rights within the territory - walk and the franchisor set up of outlets in the territory for itself compete with you in the territory?
  • Can the franchisor reduce the size of your territory without compensation to you or your agreement?
  • What evidence is there from the franchisor that the territory will support the franchise and give you the returns that you expect?
  • Has there in the past been any other franchise in the Territory and if so what happened to it?

Above all anyone looking at purchasing a franchised business needs to carry out a very careful investigation of that business as suggested above and take and follow sound accounting and legal advice from lawyers and accountants who regularly deal with franchises and understand what is involved.