April 22, 2018

How franchise buyers can avoid disputes

When buying a business from an existing franchisee, there are some things you can do to minimise the risk of a dispute arising with the seller:

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Homework

Do your homework on the franchise system and your ability to finance the purchase. If you believe that the business is overvalued, then negotiate. You’ll often lose your ability to change the price once the business sale contract is signed. Sometimes it’s difficult to work out what you want to pay for the business if the seller won’t give you all the financial information. Sellers can be reluctant to give out too much information until you sign the contract. If you’re not comfortable to proceed until you receive this information, then offer to sign a confidentiality and non-disclosure agreement. This will give the seller the comfort that you won’t misuse their information.

Read everything

The seller or their business broker will generally prepare the contract. Read the contract thoroughly and have it reviewed by your lawyer before you sign it. Contracts are legally binding and cover the entire agreement between you and the seller. It’s critical to ensure that the contract clearly sets out your respective rights and obligations, along with everything you’re expecting as part of the purchase. Disputes can arise if the contract is silent or ambiguous about something.

Remember that contracts are always up for negotiation. You should ensure the following things are addressed:

-       Is stock-in-trade included within the purchase price, or do you need to pay extra for it?

-       Who’s liable to pay the franchisor’s costs (such as the transfer/assignment fee, training fee and their legal costs)? If there’s a lease involved, who’s liable to pay the landlord’s costs?

-       Ensure the contract is subject to you being satisfied with your due diligence enquiries into the business, the franchise agreement and any lease. Without a contractual right to exit the transaction if you’re not satisfied with these things, you’ll face a costly problem if you choose not to proceed.

-       There should be a detailed list of the plant and equipment included in the purchase price. If any equipment is leased or financed, who’ll be responsible for paying out the leases? Likewise, if any equipment is hired, will you be taking on the hire agreements?

-       What licences need to be transferred for you to operate the business? These might include food and liquor licences.

-       If the contract doesn’t proceed, will your deposit be refundable? You’ll want a clear entitlement to receive a full refund of your deposit if due diligence or any of the other contractual conditions are not satisfied.

Diarise dates

Once the contract is signed, diarise the key dates. Time is of the essence in most Australian jurisdictions. This means if there’s a due date, the deadline must be met, otherwise there will be consequences. For example, failing to satisfy due diligence may mean that you are taken to have accepted due diligence. Sellers are not obliged to grant extensions if you need more time, therefore ensure from the outset that the timeframes are achievable.

Due diligence

Thoroughly carry out all your due diligence enquiries within the contractual timeframe. This should include satisfying yourself with the financial position of the business and the condition of the premises, plant and equipment. Buyers will generally need to take the assets of the business in an as-is condition. If you confirm you’re satisfied with due diligence but then wait to raise issues until afterwards, you may lose your leverage to have the seller rectify the issues.

Transparency

Be transparent with the franchisor in a timely manner. You’ll usually go through the franchisor’s standard interview and induction process. Remember that first impressions count, and this will lay the grounds for your future business relationship with the franchisor. The franchisor will ask for asset and liability statements, qualifications and work history. If you don’t comply with the franchisor’s requests, the seller could accuse you of jeopardising the sale.

Don’t rush

Only sign the franchise agreement once you’re completely satisfied that you wish to proceed. The 7 day cooling off period afforded by the Franchising Code of Conduct doesn’t apply if you’re buying an existing franchised business. Once you sign the franchise agreement then you’ll generally be bound to it.

Prepare

Work with the seller to prepare for handover and don’t assume that the seller is taking care of everything. Leaving things to the last minute can delay settlement or put you in default under the contract. Give yourself enough time to set up your EFTPOS machine with your bank and to transfer the business’ phone, electricity and other utilities.

In summary, clear communication and planning ahead can minimise the risk of a dispute arising.

By Luke McKavanagh and Peter Rouse, Rouse Lawyers 

This article was previously published on the Inside Franchise Business website.

For a no-obligation, confidential discussion with our experienced team regarding all franchising matters, contact Rouse Lawyers on 07 3667 9696