BEFORE YOU TAKE THE PLUNGE
Should you dive into a franchise? Check out this advice from the Australian Competition and Consumer Commission first.
Smart advice from the ACCC.
The unprecedented public health crisis caused by Covid19-19 pandemic has caused a major disruption to the economy. Some people now see the appeal of joining a franchise and, with it, the opportunity to run their own business and earn a new source of income.
However, just like any business, there are risks in franchising. It is easy to lose your entire investment and any assets you’ve borrowed against if you are not prepared or aware of the risks. This article looks at some key issues to consider before deciding whether or not to take the plunge and buy a franchise.
QUESTION ANY REPRESENTATIONS
ABOUT EARNINGS
Some franchisors offer a guaranteed income to support new franchisees while they build up their business, or to make their franchise more attractive to buyers. If a franchisor makes claims to you about how much you can earn, check the terms of the franchise agreement and ask them to confirm their guarantee in writing.
You should be cautious of: any terms and conditions you must meet to get the minimum income; this information should be in writing whether minimum earnings representations made at the start of the franchise can be sustained over the long term; seek professional advice to check how realistic the franchisor’s claims are.
It is also important that you have a plan for when the minimum earnings period come to an end.
READ AND UNDERSTAND KEY
FINANCIAL DOCUMENTS
A franchisor must give you some key information before you buy a franchise. This will be in the franchise disclosure document. The Franchising Code requires franchisors to update their disclosure document within four months after the end of each financial year. This means that many franchisors may have last updated their disclosure documents in October 2019.
A lot has changed for businesses over the past few months. You should make sure that your decision about whether to buy a franchise is based on information that is up-to-date. Regardless of when the disclosure document was updated, be sure to check whether the franchisor’s documents actually reflect the current financial situation.
For example, find out when the statement of solvency was signed – this is a signed statement in the disclosure document confirming that the franchisor will be able to pay its debts. If updated financial details become available after you’ve received a disclosure document, these details must be provided to you as soon as reasonably practicable but in any event before you sign the franchise agreement. Be prepared to ask questions about any information that is in the disclosure document.
Show any financial statements and reports to your accountant or business advisor. They can help you to spot any warning signs that show the business is struggling.
SEEK THE RIGHT ADVICE
If you’re thinking of buying a franchise, remember to always:
Talk to as many current and former franchisees as possible to hear more about how the franchise works in practice. They know valuable information about how the franchise system is performing. The franchisor must provide current and former franchisees’ contact details in the disclosure document.
Seek independent legal, accounting and business advice from professionals with franchising experience – they will see risks you can’t.
ACCC RESOURCES
The ACCC website has guidance for people thinking about buying a franchise, including videos and translated information: www.accc.gov.au/buyingafranchise.
The ACCC also enforces the Franchising Code of Conduct. You can find out more on our website: www.accc.gov.au/franchising.
The information in this article is for general guidance only. It does not constitute legal or other professional advice, and should not be relied on as a statement of the law in any jurisdiction. As it is intended only as a general guide, it may contain generalisations. You should obtain professional advice if you have any specific concern. n