Purchasing a franchise
A franchise is a type of business model, whereby a franchisee is granted access to a franchisor's proprietary business knowledge, processes, and trademarks for a specified period, thus allowing the franchisee to sell a product or service under the franchisor's business name.
The franchisor largely controls how the franchisee’s business is run. They also control the name, brand, and business systems used.
A franchise agreement is a legal contract. If you sign a franchise agreement, you’re making a legal promise to do what the agreement says.
When purchasing a franchise in Australia, there are several factors to consider. It is an important financial decision and you need to be well prepared and aware of the pitfalls.
Here are some key considerations
Franchise research
Thoroughly research different franchise opportunities to find a franchise that aligns with your interests, skills, and financial capabilities. Consider the industry, brand reputation, market demand, growth potential, and competition.
Franchise documents
Franchisors must give potential franchisees certain documents and information at least 14 days before they enter into a franchise agreement or make a non-refundable payment.
These documents include:
- Information statement - an official document explaining franchising.
- Franchise agreement - review the franchise agreement in detail, seeking professional legal advice if necessary. Pay attention to the terms and conditions, including franchise fees, royalties, territorial rights, duration, renewal options, termination clauses, and dispute resolution procedures.
- Disclosure document (FDD) - provides detailed information about the franchisor, franchised business and its operations, fees, obligations, and restrictions. The FDD helps potential franchisees understand the terms of the franchise agreement and the business they are considering. Learn more about franchise disclosure document and quick guide to a FDD on the Australian Competition and Consumer Commission website.
- Key facts sheet - highlights key information contained in the FDD.
- Franchising code of conduct - one of the laws that parties to a franchise agreement must follow.
Financial considerations
Assess your financial capacity to invest in the franchise. Consider the initial franchise fee, ongoing royalties or fees, marketing expenses, working capital requirements, and potential returns on investment. Prepare a detailed business plan and financial projections that take into account potential variables, such as interest rate changes.
Support and training
Evaluate the level of support and training provided by the franchisor. Find out if the franchisor offers comprehensive initial training, ongoing support, marketing assistance, and operational guidance. Understanding the franchisor's track record and reputation for supporting franchisees is crucial.
Franchisee-franchisor relationship
Speak with existing and former franchisees to gain insights into their experiences with the franchisor. Understand the level of support, communication, and collaboration from the franchisor, as well as any potential conflicts or concerns raised by franchisees.
Territory and competition
Assess the territory rights offered by the franchisor and evaluate the potential competition in the area. Understand the exclusivity of your territory and any limitations on expansion or growth.
Legal and professional advice
Consult with a franchise attorney or business advisor with experience in franchising. They can review legal documents, provide guidance on negotiations, and help you understand the legal obligations and risks associated with the franchise.
Due diligence
Conduct thorough due diligence on the franchisor's history, financial stability, litigation history, and reputation. Investigate their success rate, closure rates, and any legal issues or disputes they have been involved in. Consider the franchisor's brand value and reputation in the market.
Exit strategy
Understand the franchisor's policies regarding selling or exiting the franchise. Consider the resale value of the franchise and the process involved in transferring ownership.
Remember that purchasing a franchise is a significant investment and commitment. Taking the time to research and evaluate various aspects of the franchise opportunity can increase your chances of making an informed decision and finding a franchise that suits your goals and aspirations.
Franchise online training
The Australian Competition and Consumer Commission has a free online franchising course Is franchising for me? that has been created to help people better understand franchising. The course is aimed at those doing early research or who are about to sign a franchise agreement.
The course covers the following topics:
- how franchising compares to independent small business ownership or employment
- what you are likely to find in a typical franchise agreement
- about due diligence and why it’s important
- some of the common issues you can face
- where to get more information and guidance to help you decide
- the main laws that apply to franchising
- information about leasing.