HOW TO BUY A FOOD FRANCHISE

A must-read if you’re hungry to invest in the food and beverage market.

Hungry to invest in a food franchise? Before you bite into this sector, use our easy guide to check out what you need to do to buy yourself a business.

To get it right when you sign up to a franchise you’ll need to take certain preparatory steps. And if you’re choosing a food service business model, there are some industry-specific elements to consider. But don’t worry, we’ve made the job easy.

RESEARCH

“I see a lot of people who buy a particular franchise because they love the product or service being delivered – they are a customer and think ‘this food is fantastic’ (assuming it’s a food business) and they imagine they would love to be selling this to customers themselves,” writes Corinne Attard.

“Now, having a great in-demand product is not the only thing to think about. Many restaurants and fast-food places (‘quick service restaurants’ being the industry term) sell delicious food so this is just the first and most obvious requirement.

“Here are my key steps to buying a food franchise.”

STEP 1. RESEARCH, RESEARCH, RESEARCH

Due diligence is spoken about a lot but what does it involve? You need as much information as possible about the way the business operates and what is going to be involved. The franchisor is one source of information but you need to speak to current and previous franchisees to assess their experience of running this business and obtain the answers you need.

For a food business some specific suggestions are:

Count the customers

Try to do a transaction count of the business or one very similar in the network. This means sitting in the business over the day and counting the customers and estimating their average spend – you can then get a realistic idea of sales. You may need to repeat this over different days.

Survey the customers

Ask the customers about the service they receive, the product and how often they buy from the business.

Collect data

Get some hard data on specific items such as your occupancy cost (rent and outgoings as a percentage of sales) and your cost of goods sold (COGS). These ratios are percentages you can then use to compare across systems and specific businesses.

Check the supply chain

Find out from the franchisor which suppliers you can use for the various ingredients (e.g. soft drinks, coffee, milk, cleaning products) and packaging you’ll need in the business. If you can, find out what prices are charged to franchisees. How does this compare to other suppliers? Make some phone calls to find out. It is a fact of life in franchising that the supplier chosen by the franchisor may not be the cheapest, so ask why if this is the case.

You may be told it is because the franchisor wants to be assured of consistency across the system so a national supplier is preferred; or it could be because the supplier is a related entity to the franchisor, or that there is a rebate or other incentive being paid to the franchisor or into marketing. These are very

common reasons and not a reason on their own to reject a system. It is the overall cost to the business compared to the sales generated (and your other expenses) that is critical.

If you are comfortable with the overall level of COGS (that the gross profit margin is sufficient) then prices of particular supplies may be of less importance. If you consider that the supplies are unreasonably inflated compared with similar brands or an independent operation, then walk away and find an alternative.

Investigate labour costs

Find out how wages are determined (award or workplace agreement) and what is the level of staff costs you can reasonably expect.

Check fitout and equipment costs

How often will you need to refit the premises and what is the likely cost? Can you lease some equipment? What finance options are available?

Assess the competition

Analyse the market both locally and nationally. Some food categories such as chicken have brands that are very similar; have you considered these alternatives?

Look at brand lifespan

How sustainable is the demand for your products or this brand? Is it a passing fad or something that will continue to be in demand by consumers long term? The advantage of riding a wave will be forgotten when your signature item is no longer in fashion and the customers have disappeared. Is this a brand or business in growth mode or is it declining?

Evaluate delivery options

Are you expected to provide delivery or use a third-party delivery supplier such as Uber Eats? If so, how will this affect your profit margin? How do deliveries compare to takeaway and dine-in? Find out which is more profitable.

Understand the leasing situation

Who holds the lease: the franchisor or franchisee? There are pros and cons to both but however it is structured you will be liable for the rent.

STEP 2. Read all the documents

You will receive a large bundle of documentation (franchise agreement, disclosure document, lease and other documents) but don’t skip reading them. Note or highlight things you don’t understand or need more information about. Ask to receive the documents as early as possible; drafts or template documents if the final ones will not be ready for a while.

STEP 3. Obtain expert advice

You must get good advice from professionals who have experience in these types of businesses and franchising. This should include accounting and legal advice about the documents, but also consider a leasing consultant if you need to find your own location and negotiate a lease, especially if the franchisor does not offer this expertise. General business advice about finance and business planning may be available from your accountant or you may need to find someone else with this experience. You need to understand and plan for your eventual exit, such as through sale, and understand how to achieve your objectives.

STEP 4. Sign only when you are ready

Never be rushed into anything. It’s a big decision and reputable franchisors want you to be comfortable and they want to make sure you are committed. There are a lot of franchises in the market so be prepared to walk away if you feel pressured.

STEP 5. Second thoughts?

If you do have buyer’s remorse despite taking these steps or there is a sudden change in circumstances you can use the seven-day cooling off period if you have already signed, but if that has passed and is not available, speak to your franchisor. They may have a solution to help you either stay in your new business or to exit.

CHECK THE LEASE

“By the time a franchise buyer has sifted through the franchise application, purchase contract and franchise disclosures they can be overloaded with information,” writes Philip Chapman.

“And that’s when important steps in assessing and reviewing lease documents are missed. But leaving the lease to others and assuming everything is fine is like playing Russian roulette with your future livelihood.

“If things go wrong and your defence is ’I didn’t realise’ or ’no one told me’ it isn’t going to solve the problem.

“If you think about the process of buying a retail business as the mix to bake a cake then investing in a food franchise is a recipe for a multi-layered gateau.

“First-time franchisees are faced with a long ingredient list but not necessarily a clear set of instructions. So where do you start?

“I recommend starting with the lease, as without premises to trade from the rest doesn’t come in to the mix.”

UNDERSTAND THE LEASE

The landlord’s disclosure statement is a formal document designed to set out all the essential terms of the lease and the shopping centre or property.

But it’s important not to confuse this with the mandatory franchisor’s disclosure document – you will need to see the landlord’s disclosure statement, too.

The landlord’s disclosure statement must be reasonably fresh, no more than 12 months old as the information needs to be current and relevant, and the basis from which to start asking questions.

The other important question before you start is: will the lease to be held by you or the franchisor?

If you will hold the lease then the current lease will need to be assigned to you. The seller, or the holder of the lease, is responsible for the application to the landlord. But beware there are requirements to be met which means more paperwork and set time frames to be taken into account.

However, if the lease is to be held by the franchisor then you will need a license agreement approved by the landlord to give you the right to operate the business in the premises.

On the page opposite is a sample of the items you need to be across when purchasing a food franchise.