If you are looking through opportunities on Bsale you may be wondering what you need to review in a franchise for sale agreement. This is a common question asked by potential buyers. A franchise agreement is a legally binding contract that outlines the relationship between the franchisee and the franchisor. When you buy a franchise for sale you are legally committing to the agreement and must abide by the rules that are set out.
In Australia, we have the Franchising Code of Conduct that all franchise systems must abide by. It is a requirement that a Franchise Agreement and a Franchise Disclosure Document be provided to potential buyers.
There are a number of items that will be outlined in the agreement that may affect whether or not you want to buy that particular franchise for sale. Every opportunity will have a different agreement so it's essential you obtain professional advice to help you review the document.
Here are some reasons you need to review the franchise for sale agreement in detail.
When you buy a franchise for sale there is usually the expectation to undergo training and pay an initial franchising fee. This is outlined in the franchise agreement and is usually in addition to the purchase price. It's important to factor this cost into the price you are paying for the franchise for sale as you will need to pay for this soon after you have purchased.
How much is that initial fee and what does it include? Usually, there is a training period you must undergo as a new buyer so you learn the system and how to perform to the best of your ability in the franchising system. When comparing franchises for sale, take that onboarding fee into consideration as it can vary significantly.
As a franchisee, you are buying into a system. This means you are purchasing the rights to operate under a particular brand and use their intellectual property, resources, systems, products and so on. You need to clearly understand the franchisor's expectations when you buy a franchise for sale. Understanding the requirements and the limitations of how you can operate is important.
If you have never purchased a franchise for sale or been part of this type of system, there are a lot of procedures that go into making a brand successful. As a franchisee, you are responsible for continuing the high level of standard set by the franchisor.
The franchisor may have expectations surrounding:
Sales and KPIs
Shop refurbishments and fit-outs
Employee hiring, training and satisfaction
Marketing and promotions
Sourcing and selling products
Purchasing equipment and fittings
Levels of service
When things don't go to plan, you need a way to resolve the issue. Is a clear dispute resolution process outlined in the franchise for sale agreement? As a buyer you are committing your time and money into purchasing a franchise for sale, you need to make sure you have a way to have your voice heard and reach some conclusions.
Marketing is typically a core component of generating income. Understanding who is responsible for marketing, whether you can do any local marketing or if you are at the mercy of the franchisor is important.
When you are looking at franchises for sale you will see some locations are a lot more profitable than others. This could be due to location, foot traffic, demographics, competition or marketing strategies. You want to make sure the agreement outlines how the marketing is handled and what level of input you have as a franchisee. You may find you have very little say in marketing options, or you may get a certain budget that can be used at a store level, such as sponsoring a local sporting team.
As the franchisee, you will owe the franchisor fees. This is common in the majority of franchising structures as this is how the system works. What you need to review is the type and amount of the fees.
There may be fees charged on:
Equipment and Fittings
It's important you have a clear understanding of the type of fees that will be charged and the percentages. When you are entering a new opportunity and buying a franchise for sale, you need to know where every dollar is going. How do the fees work if you have a low sales month? Who is responsibly for marketing fees? Are training fees additional? etc.
If you are buying an established franchise for sale you will be able to review financial history and get an understanding of the profitability of that particular location. If you are buying a new franchise for sale, you will have very little understanding of potential profits.
When buying an opportunity, it's important to remember that it doesn't mean you will make money. It is the hope and plans that it will be successful, but it's important to remember there may be times when you may not make money, or that you will need to find additional funds to invest in the franchise for sale such as purchasing new equipment or a vehicle. You may also be required to work very long hours.
The agreement may not outline this, or what happens when you make no money. But it is something you should take into consideration.
If you are buying a franchise for sale, you will probably have a good understanding of the options, after all, you are just about to buy one. But what you need to check is the level of input or control the franchisor has on you selling a franchise.
In the agreement, it will outline how you can sell a franchise. You may have to use an internal team at the head office, a specific business brokerage or you may be able to market and sell the franchise yourself. There may be additional fees involved. This needs to be reviewed so you know your exit options.
It is now a legal requirement that all franchises for sale in Australia provide a disclosure document to potential buyers. This document exists so that people entering a franchise system, can make a well-informed decision. It will outline the current and historical circumstances of the franchise for sale. In the past, franchise groups often got in trouble for hiding information from potential buyers, so the ACCC made this a requirement.
All franchisors are required to have a disclosure document that must be updated at the end of every financial year. It should be current when placing a franchise for sale.
The ACCC has developed a model disclosure document that can be followed by groups to ensure they are following the rules of the Franchising Code of conduct.
If you are thinking about buying a franchise for sale there are a number of helpful resources provided including a short course by the ACCC on the process of buying a franchise.
As with all major decisions, it's important you obtain professional advice from a franchising consultant, business broker, accountant and solicitor before entering into any agreements.
Vanessa is the current manager and CEO of Bsale Australia. Over the past 11 years as a business owner, she understands what it takes to grow a ...