Due Diligence & Franchise Agreements
When buying a Franchise it is essential to carefully evaluate the Franchise business and the Franchisor, and obtain legal, accounting and business advice before signing a Franchise Agreement.
From a legal perspective, Franchisees need to understand that in most cases they should not rely on any information provided by the Franchisor and need to carry out their own investigations and verify any information that they have relied upon. Franchise Agreements will typically say so expressly.
Most Franchise problems arise because the person buying the Franchise business has not undertaken sufficient independent due diligence and/or obtained legal advice before signing a Franchise Agreement. To make matters worse, when these problems become apparent the Franchisee has usually spent all of their money buying the business or trying to keep it afloat and often can not afford to see a legal claim against the Franchise through to its conclusion. They have typically borrowed money to purchase the Franchise and face the prospect of bankruptcy if the business fails.
Evaluating the Franchise Culture & Operations
Understanding the legal effect of a Franchise Agreement is one thing, however, it is equally important for the prospective Franchisees to evaluate the culture of the particular Franchise and realistically assess the commitment required to operate the business and whether they are suited to it. For example;
- Does the Franchise require the owner to work an 80 week to make ends meet?
- What day-to-day activities will I be required to perform?
- What initial and ongoing training will be provided?
- What level of day-to-day support can be expected by the Franchisor?
- Will the initial training provided equip me to run the business from day one?
- What real profit can I expect?
- Am I just buying myself a full time job?
- What is the Franchisor like to deal with if I have a problem or want to renew or sell the Franchise Agreement?
Even before seeing a Solicitor I recommend that clients speak to a Franchise Consultant and obtain business advice about the Franchise. As one consultant once said to me:
“Franchise buyers that don’t get “business advice” can’t make an informed franchise purchase decision because they don’t have all the information in front of them; and this often results in problems. It’s like starting a new exciting job that looks great on paper but the workplace sucks! Only you can’t quit – you’re stuck with it for years!!!”
What is the cost of Franchise Advice
Many Franchisees experience great success and end up owning numerous Franchise businesses. However, these are typically the people who have properly investigated the Franchise and sought appropriate advice before signing the Franchise Agreement. While there is of course costs associated with obtaining advice in relation buying a franchise, consider the alternate cost of becoming involved in litigation against the Franchisor or the risk of losing everything you own if the business fails for whatever reason. Instead ask yourself, can I afford to enter into a Franchise Agreement without fully understanding the obligations and risks? Most people can not afford to throw away tens or even hundreds of thousands of dollars.
If you are thinking about buying a franchise business, contact us today for a free initial legal evaluation.
