Q: Buying a franchise arm

smallbusiness 26/07/2016

What key considerations should I bear in mind when thinking about buying a branch of a franchise?

Expert Answer

“Buying a branch of a franchise may seem like the ideal way to start up a new business rather than creating a company from scratch. However, as with all business ventures, there are a number of important areas that should be carefully considered to ensure the greatest chance of success.”

“Before making any firm decisions, it’s extremely important to do your research and investigate how well the franchise is doing. This needs to be done at the very beginning so you can explore all options and fully understand what the franchisor is like and if you would like to work with the company.

Without conducting in depth research, you could spend time entering into agreement discussions only to realise you don’t actually agree with some of their proposals. You should consider asking questions such as: how much involvement will the franchisor expect to have in the business?

How much assistance will the franchisor provide to launch? And how much investment is needed to set up the business? Knowing the answers to these questions will allow you to make informed decisions before you are tied to any agreement.

“If you do make the decision to open up a franchise, you will need to make an application which then has to be accepted by the franchisor. Following acceptance of the application, a franchise agreement will be put in place to formalise the terms of the relationship and set out everything that has been agreed between the franchisor and the franchisee.

This is the most important legal document, so before signing it, make sure it includes everything as discussed and that you understand it.

It’s usually very long as it will cover all aspects of the business, including the length of the agreement, the fees and costs involved, the territory that the franchisee can trade in and how the business will be transferred if the franchisee wants to exit.

“Another aspect to consider early on is how much it will cost to set up the franchise. There may be fees to pay upfront, such as a start-up fee which will cover the cost of setting up the agreement, carrying out any necessary training and any professional fees.

From then on, there are likely to be other fees to take into account which will need to be paid over the course of the agreement. For example, it’s common for franchisees to have to pay a ‘royalty’ fee, which is a regular payment and is usually based on a percentage of the total sales.

Alongside this, you may be subject to other fees including contributions to advertising funds or renting costs if the franchisor owns the premises. Any fees that you are subject to should be written in the franchise agreement from the start.”

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