The Various Steps in Buying a Franchise Business

Franchising is often described as being like a marriage – a long-term relationship where both parties must trust and respect one another.  Like a marriage, both parties need to be passionate about the benefit of the relationship, and get to know each other well before making that commitment.

The ongoing nature of the franchise relationship makes choosing the right partner a crucial decision.  To maintain a ‘happy family’ for the term of the franchise there needs to be constant, quality two-way communication between franchisee and franchisor.

You will want to ensure the franchisor is trustworthy, ethical, and professional - a person or company that you want to do business with.  Equally the franchisor will want to check you out – selecting the right franchisees is one of the most important things a franchisor can do.  They will have thought about the types of people or the type of person who suit their franchise, and will want to ensure potential franchisees fit that profile.

If you do purchase a franchise, you and the franchisor will be together for a long time.  The following will give you an idea of the process involved in buying a franchise and what to expect.  The process may vary between franchises, however each of these steps will probably be included in one way or another.  We encourage both parties to take their time and make an informed decision.  Be systematic in your approach – chances are the franchisor will be!

1   Planning

Firstly identify how much capital you have to invest to start your own business under the umbrella of an established brand and a proven franchise business format.  It is wise to be prepared.

Behind every successful business is sound planning.  Your planning should include identifying the capital, skills, and resources you have available, industries that excite you, businesses that suit your lifestyle and family, and preferred locations.  Make your criteria realistic.  Don’t over leverage, and maintain a reserve in the event the business may require more working capital in the future.

Finding the perfect business is difficult - if you find a franchise that fits your criteria make contact.  Don’t be afraid to enquire about any franchise that interests you.  Take the opportunity to ask for information.

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2   Making Contact

With more than 300 franchises available in Australasia there are a lot of opportunities to select from.  To speed up the process your first call could be to LINK as we represent many franchise systems and in our initial meeting can assist you in identifying the types of franchises suited to your skills and finances.

We have a range of franchise resales and new business opportunities, giving you an excellent introduction to the franchise industry.

With our wide knowledge across the entire franchise industry we will give you a valuable overview on many franchise opportunities at our initial meeting.

If you have a specific franchise you have already identified you want to find out more information about, then we would commence by sending you an information pack.

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3   Information Pack

The information pack you receive will usually contain an introductory letter, a brochure (or ‘franchise overview’), a confidentiality agreement and possibly an application form.  The purpose of this pack is to give you a broad outline of the business and its track record - its products and services, history, and cost.  It will often spell out the skills the franchisee needs, such as ‘ability to motivate a team’ or ‘enjoys the outdoor life’.

This brochure will be an outline only, and you are not expected to make the decision to buy a franchise based upon it.  Its purpose is to tell you a bit more about the opportunity so you can decide if you are interested without the franchisor having to give away too much confidential information.

If after reviewing the information pack you like the business, your next step will be to complete the confidentiality agreement and schedule a meeting to discuss it in detail

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4   Confidentiality Agreement

Completing the confidentiality agreement does not commit you in any way, it merely shows you are serious about investigating that franchise and want more information.  Most franchisors will require you to sign this to confirm that you will not disclose information about their business to any third party other than your professional advisor (Accountant, Bank Manager or Lawyer).  This protects the franchisor against commercially sensitive information falling into the hands of their competitors – if you buy this franchise you will expect the franchisor to protect the system in which you have invested your hard earned money.

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5   First Meeting

The first meeting is likely to be informal and will give you time to find out more about the franchise.  If you are looking to go into business with a spouse or partner, it is important that they attend the meeting as well.  Keep them involved throughout the process.  Most franchisors interview both partners.  They know that even a motivated hard working individual needs family support to keep up the effort of running their business, and want to make sure your partner shares your commitment and vision.

Prepare for this meeting by studying the information you have already and by finding out as much as you can about the franchise.  If possible visit several outlets as a customer, check out their website and watch out for advertising or news stories.  It is your money - the franchisor expects you to ask questions.  There are no stupid questions.

In return, you will be asked questions.  The franchisor wants an ‘overview’ of you as a potential franchisee.  You won’t generally be asked too many personal questions at this stage - they want to know about your relevant experience and understand what motivates you to consider buying this franchise.

In the process of buying a franchise you will almost certainly have several meetings with your potential franchisor.  This first meeting should give you a clearer idea of whether this opportunity is the right ‘fit’ for you (remember your criteria).  It will also give the franchisee selector an indication of whether you match the franchisee profile they are looking for.

If after this meeting you are interested in proceeding further, your next step will be to fill out and return the application form if you haven’t already done so

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6   Application Form

The application form is not a formal contract and does not commit you to anything.  Many potential franchisees are surprised by the number and personal nature of the questions in the application form – it is the franchisors way of ensuring you are serious and is part of “getting to know each other”.  It will ask some standard questions such as your previous work and business experience, and referees (both personal and business).  It may also ask some searching questions about any partners that may be involved and your financial position – including your present income, living expenses, savings, assets, equity in property, mortgages, debts, and whether you have ever been bankrupt.  How do you plan to finance and operate the business?  Will your partner continue to work elsewhere while you build the business, or will you both be involved from the start?

Why do they want this information?  They need to ensure you have the funds and security to purchase the franchise, and working capital to get started.  The last thing you need when purchasing any business is to be under capitalised.  This is one of the most common reasons for business failure, so you will not be accepted if you don’t have sufficient capital.  Although it may not seem like it at the time, the franchisor is actually doing you a favour and saving you from making an expensive mistake if they decline your application for this reason.  It is vital that full, honest and complete details are given to the franchisor so they can determine your chances of success.  All reputable franchisors will treat this information in complete confidence.

Purchasing any business is only partly a financial decision, and there are many other aspects of your application the franchisor will consider – do you have the skills needed to run the business or the ability to learn them?

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7   Disclosure

Once your application has been received by the franchisor you can expect a further meeting.  A good franchisor will take care to ensure you are given all the factual, detailed information you need to make your decision to buy the franchise or not.  This generally takes the form of a prospectus (‘disclosure document’).

If you are dealing with a reputable franchisor, such as a member of the Franchise Association of New Zealand (or the Australian equivalent), the disclosure document should contain:

• A company and personnel profile
• An outline of the franchise operation and provisions of the franchise agreement
• A list of components, costs and a schedule of payments
• Financial requirements by the franchisor
• Training and support of franchisees
• Declaration of the franchisor’s income sources (Initial fees, royalties, product margins, marketing contributions, and supplier rebates)
• Declaration of franchisor’s ability to pay their creditors (solvency)
• A list of existing franchisees and company owned outlets
• Details of any franchisees terminated or not renewed in the past year
• Information on any outstanding litigation
• Indications of the financial returns for franchisees

Franchisors are cautious about making projections about how profitable a new outlet will be.  While some service franchises provide guaranteed income, it is important to realise that most franchisors cannot guarantee your business results.  As a prospective purchaser you need an indication of sales, costs and potential return on your investment before making a decision.  The disclosure document should contain enough financial information for you to evaluate the opportunity and formulate your own business plan.  Financial information given in the disclosure document should be based on realisable figures and actual performance of the franchise (from existing franchisees or company owned outlets).  Check the assumptions – why does the franchisor believe an outlet in this new location will be profitable or have a similar trading pattern to existing outlets?

Some franchisors will ask you to pay a deposit of perhaps several thousand dollars when you lodge your application, or before you receive the disclosure document.  This is not uncommon, and is a technique used to identify those who are seriously interested.  Any such deposit should be fully refundable if you decide not to purchase the franchise.  Make sure you confirm this in writing, and get a receipt for any such payment.

In addition to the information the franchisor gives you, you should also be prepared with questions from your own research.  A good franchisor will welcome thorough questioning - it shows you are serious.  Ask questions and write down the answers.  With the same questions asked of each franchisor you talk with, you can make accurate comparisons – it will become obvious exactly what each franchise offers, and therefore which one best suits your requirements.  One of the most important things to check is whether the franchisor is a member of the Franchise Association of New Zealand (or the Australian equivalent) – their documents must meet a certain standard and they are bound by their Code of Practice.

8   Interview

At this stage, you can also expect to be asked many more personal questions, in much the same way as you would in a job interview.  Although you are not applying for a job, you and the franchisor are both determining whether you can work together in a franchise relationship over a period of time.  Just as you have been evaluating the franchise, the franchisor will be evaluating you as a potential franchisee.  Has this person got what it takes to run their own business?  Are they committed enough?  What do they expect from the franchisor?  Will they take guidance from us?  What do they want to achieve with their franchise?  Can we work with them?  Some franchisors will require personality or psychometric profiles of you to help determine your suitability.

Most small businesses involve some sales activity and require good communication.  Franchisors are generally looking for someone who is a team player who can follow guidelines, and listen to advice.  Someone who likes dealing with the public, customers and staff.  They will also consider the role you will be playing in the franchise – front line hands on operational, or behind the scenes administration and management - and the skills, experience and interests you have.

Some franchisors prefer that you have no previous experience in that type of business, so they can train you to use their system without any preconceived ideas.  They want someone who is open-minded, logical, organised, and has attention to detail.

Franchising doesn’t suit independently minded people.  As a franchisee you exchange security, training and support, buying power and ‘group grunt’ for independence.  A franchisor may limit what you can sell, opening hours and how you promote your business.  Franchisors are looking for ‘intrepreneurs’ rather than ‘entrepreneurs’ – people who are prepared to work within the boundaries of a defined system and acknowledge that the franchisor has expert knowledge of the business, while having the drive and ambition to develop and build their own business.  This is not an easy combination to find.  Top franchises can afford to be choosy about who they accept, and rightly so - they have to be to protect existing franchisees.  Appointing the wrong franchisees only guarantees problems in the future.  Even a new franchise cannot afford that.  Beware of desperate or poor quality franchisors who pressure you to buy or will accept anyone who has the money (‘chequebook franchisor’), with little consideration of whether you have the skills it takes.

Be reassured by a rigorous selection process – if your application is accepted you know you have a greater chance of success, and that the franchisor is less likely to take on a franchisee that could bring the franchise into disrepute.  A good franchisor wants to ascertain you have the ability to learn to operate the franchise.  Identifying your strengths and weaknesses means the franchisor can tailor your initial training and ongoing support to minimise the risk and maximise the opportunity for you.

9   Franchise Agreement

If both you and the franchisor are happy to proceed at this stage you should also get a copy of the franchise agreement.  This is the legal document that forms the framework for the franchise.  It is a legally binding contract which defines the relationship, roles and obligations of the franchisor and franchisee.  It is likely to be 8 – 40 pages long and written by lawyers.  Don’t let that put you off reading it and getting the franchisor to explain it to you.  However you also need to seek professional legal advice before signing it.

10   Other Franchisees

The disclosure document should contain a list of existing franchisees and their contact details.  Our advice is to phone and visit as many as possible, and ask them the same questions you asked the franchisor.  By doing this you will get an overall picture.  Some will be excellent, others may be poor operators.  You will catch some on a good day, others on a bad day.  You will get a range of opinions.  Ignore the extremes, and look at the overall picture.  Does it live up to the franchisor’s promise?

Visiting outlets will show you what your day-to-day role will be.  Picture yourself as the business owner/operator.  Check you will enjoy working in this environment.  If you are considering a service franchise, ask if you can go out with an existing franchisee for a day.  Apart from seeing the reality of the business, you will learn much from the way the franchisee talks to you, and what they tell you between calls.  You always learn more when visiting franchisees and touring the businesses.

This is also the time to see how well developed the franchise systems are.  Ask to see the manuals and a demonstration of software provided.  You probably won’t get to take them home, but you should be given the chance to look at them and see how comprehensive they are – after all the system is what you are buying.

11   Professional Advice

Once you’re this far through the process you will have a clear picture of the franchise and whether you want to join it.  Now is the time to seek professional advice – commercial, financial and legal.

On the financial front an accountant is needed to verify the financial information provided by the franchisor, and to help you formulate your business plan.  If you are thinking about investing your hard-earned money in a franchise put those figures before an accountant.

You’ll also need a lawyer to examine and explain the franchise agreement to you – to ensure you understand it.  Some franchisors require a solicitors and accountants certificate to verify you have received this advice.  Use advisors who have experience in franchising – because not all do.  Solicitors and accountants who are specialists in franchising can provide better advice than those who don’t.  This will cost you, but it is money well spent.  Now is not the time to cut corners.  An inexperienced advisor could end up costing you a lot more than their fee.

Don’t expect your lawyer or accountant to approve or endorse your choice of franchise; they are paid to be cautious on your behalf and to point out potential pitfalls.  Don’t be too discouraged or back out of a franchise you are keen on until you’ve identified if the issues raised are real.  We strongly recommend that you go back to the franchisor and existing franchisees with any concerns.  They know the business better than your advisors.  Any business involves risk.  Only you can decide whether you are comfortable with the risk involved.

12   Make Your Decision

Now – make your decision.  With a franchise you are not in business by yourself, but you are in business for yourself, and it will be your own business.  The buck stops with you.  By now you will have collected more information than most business buyers, and be well equipped to make an informed decision.  Make your own decision based on your evaluation and risk assessment.

If you decide to proceed and purchase the franchise, and the franchisor accepts you as a suitable franchisee then you will be required to pay the franchise fee into a solicitor or brokers trust account to secure it.  Any other payments will be required as per the schedule in the disclosure document.

If the franchise adheres to the Code of Practice set out by the Franchise Association there is normally a seven day cooling off period after you sign the franchise agreement during which time you can change your mind and not proceed.  However, if you have done your homework properly you probably won’t want to.

Congratulations – you are now part of a franchise.  Setting up and training for your new business can start!  Welcome to the world of self employment.  There are few joys as great as running a profitable business with the support of the right franchisor, and we hope that you enjoy precisely that.

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FAQ's

Is joining a franchise right for me?
Can you operate under guidelines in a defined system?
Conversely, are you the sort of person who needs supervision and reassurance, and are over-reliant on others?

Q.   Is joining a franchise right for me?
A.   All successful businesses begin with comprehensive planning, and if you are considering buying a franchise, it is no different.  While the systems are already in place as part of the franchise offer, potential franchisees need to examine carefully all aspects of the venture - consider the capital, skills, and resources you have available, industries that excite you, businesses that suit your lifestyle and family, and preferred locations.  Franchising doesn’t suit everyone.  You need to ask yourself if franchising is the right option for you.

A franchise provides proven systems already in place for franchisees, including marketing, training, product development, and an established brand.  With these proven formulas comes an expectation that you, as a franchisee, will conform to these systems, and this will be written into the Franchise Agreement.

Q.   Can you operate under guidelines in a defined system?
A.   There should always be room for initiative and a good franchisor should be willing to consider options put forward by their franchisees.  However, if you are the sort of person who tends to believe they know better and will go against the franchise vision or their advice, then maybe franchising is not the right business option for you. 

Q.   Conversely, are you the sort of person who needs supervision and reassurance, and are over-reliant on others?
A.   If so, then once again maybe a franchise, or having your own business, is not right for you.  While franchising offers systems, when it comes down to it you will still own your own business and will need strong business acumen, independence and initiative.  Like any business franchising involves risk, and being responsible for your own success.  Ultimately the success of your franchise business is up to you.

Once you’ve answered these questions honestly, and you think becoming a franchisee is right for you, then continue with your business planning.  And don’t forget, when it comes to finding the right franchise system for you, we’re here to help.

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