ALL YOU NEED TO KNOW
Find your way through the maze of paperwork.
Buying into a franchise is an exciting time – until you are handed the mound of papers that make up the franchise agreement and disclosure document. While these documents can seem daunting, they contain useful information that will help you make an informed decision about whether to go ahead with the franchise opportunity.
Both documents, in particular the franchise agreement, should be reviewed by a lawyer with expertise in franchising.
However, going through the disclosure document yourself is also a great due-diligence exercise. Note that all disclosure documents are in the same format, as set out in the Australian Franchising Code of Conduct, so they are not too hard for you to navigate.
Here are some tips on what you should look out for...
FRANCHISOR’S DETAILS
The key thing to note is how long the franchisor has been running their franchise system. This gives you an idea as to their experience. However, do not be too concerned if the franchise system is relatively new. This usually means you need to be extra cautious in doing your due diligence, and if necessary you are entitled to extra evidence of their solvency.
BUSINESS EXPERIENCE
This set outs the business experience of the franchisor and key personnel. Sometimes a franchisor’s staff and business may be largely based overseas. If so, check if the franchisor has Australianbased personnel, as it is always preferable to have local staff as your main point of contact when running the franchise.
LITIGATION
This specifies any legal proceedings involving the franchisor or its directors and officers. Of course, it would be preferable there be no listing.
If proceedings are listed, you should check:
• What do they involve?
• Are there any breaches of the Australian
Franchising Code of Conduct?
Find your way through the maze of paperwork with this guide to the
disclosure document.
• Is the matter ongoing or has it been resolved?
• What financial impact have the proceedings had or are likely to have on the franchisor?
It is also a good idea to query the proceedings with the franchisor and raise the matter with your lawyer or accountant, who will be able to advise further.
Even if no litigation is listed, it is still prudent to do a search of the franchisor online and on the ACCC website to see if there are any other issues or investigations involving the franchisor.
EXISTING FRANCHISES
There are two simple exercises you can undertake from the information about existing franchises. The first is to contact a few franchisees to ask them about their experience with the franchisor and the franchise system.
Some good questions include:
• How have they found their dealings
with the franchisor?
• Do they receive adequate support? • What kind of marketing is done by the franchisor?
The second exercise is to contact previous franchisees and ask them why the franchise relationship ended. Again, ask what it was like dealing with the franchisor.
Contact
details
of
existing
and previous franchisees should be listed in the disclosure document, unless previous franchisees have asked that their details not be disclosed.
INTELLECTUAL PROPERTY
Sometimes, the intellectual property may be owned by a company other than the franchisor itself. If this is the case, check as to whether there is an agreement in place between the intellectual property owner and the franchisor that might affect your right to use the intellectual property.
PAYMENTS
The franchisor must disclose establishment as well as ongoing costs involved in the franchise. This information is obviously quite handy for your due diligence.
It is always a good idea to review these payments with your accountant to ensure the franchise opportunity is viable and allows you to pay a salary to yourself.
MARKETING FUND
If the franchisor runs a marketing fund, its expenses for the past financial year will be detailed. This will give you a good indication of how much marketing the franchisor does and just how far your marketing fees will go.
You should also ask the franchisor to give you a copy of the marketing fund’s financial statements, which will provide a more detailed breakdown of the fund’s income and expenses.
All disclosure documents are in the same format, so they are not too hard for you to
navigate.
FINANCIAL DETAILS
Perhaps the most important item to tick off your due diligence is that the franchisor is solvent. Along with providing a signed statement of solvency, the franchisor must give you with either its past two financial reports or an independent audit report.
If the franchisor is less than two years old, it instead must give you a statutory declaration as well as an independent audit report of its solvency.
A ll t his i s by n o m eans a n e xhaustive list of what to look out for, and your franchising lawyer will no doubt discuss these items in greater detail with you. However, it is a useful exercise to go through the disclosure document yourself to gain a better understanding of the franchise opportunity and equip yourself with the knowledge to make an informed decision.