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Top tips for buying a franchise
Recently a business woman purchased a well-known franchise eatery and began trading in what she felt was a prime location in the CBD. Things were going extremely well until a new eatery opened on her block. The business owner had expected competition … but not from an eatery of the same franchise!
Unfortunately because the business owner hadn’t made sure that she had an exclusive territory, the Franchisor was able to sell another franchise and place it anywhere it liked.
This is not uncommon. Many purchasers of franchises in New Zealand do not seek professional advice prior to entering into Franchise Agreements. Unfortunately, many of these enthusiastic purchasers end up requiring professional advice when they discover that they did not understand what they signed up for and run into strife, like the above business owner.
The following are our top 6 tips to consider when contemplating a franchise purchase and prior to entering into a Franchise Agreement:
1. Renegotiate the Franchise Agreement
It is important to realise that Franchise Agreements can be difficult to renegotiate. However, Franchisors are able to agree to specific terms that apply only to you, including terms that vary existing terms, so it is worth attempting to renegotiate those aspects of the Agreement that you feel are particularly critical to your success.
2. Gathering Information... including about the Franchisor
Ask as many questions, and gather as much information, as possible from the Franchisor (the owner of the franchise) in relation to the franchise model and the performance of existing franchises using the model.
Also, as a franchise owner you will be in business with the Franchisor. How communicative is the Franchisor and how willing are they to answer your questions? Speak with existing Franchisees if you can.
3. Location and Territory
Make sure you are satisfied that the site you will be operating from suits the nature of the business (particularly where the Franchisor has chosen it) as this will impact on your likely success. Also question whether you have exclusive rights to the territory, or could a competing franchise be established next to yours? Attempt to negotiate an exclusive territory wherever possible.
4. Performance Targets and Ongoing Fees
Franchise Agreements require Franchisees to regularly achieve minimum performance targets. Ensure these are achievable by asking questions about how the Franchisor set the targets.
Most Franchise Agreements will also outline a number of ongoing (usually annual) fees for things such as nationwide marketing, on-going training etc. Make sure these fees are realistic and affordable.
5. Make sure you’re not liable for the Franchisor’s mistakes - Limitation of liability
It is common for Franchisors to exclude their liability for certain types of loss that are difficult to predict or manage. However, some Franchisors attempt to exclude their liability absolutely, or require broad indemnities from the Franchisee. This can limit your ability to hold the Franchisor to account. Therefore, attempt to dilute these limitations.
6. Exit
Think about how you can exit your arrangement... Make sure you’re happy with the steps outlined in the Franchise Agreement.
Conclusion
For many, entering into a franchise will be one of the biggest business decision of their lives. Accordingly, it is essential that, before you sign on the dotted line, you have first done your due diligence and have sought professional advice.
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