October 4, 2013

Purchasing a new franchise? Things to consider

Purchasing an existing franchise? Things to consider
Purchasing a franchise is an exciting time, but the length and complexity of the legal documentation and other considerations to take into account can be quite daunting. When purchasing an existing franchised business, there are a number of factors to consider.
Some of these considerations include:

  1. the terms of the contract of sale. These should be conditional upon the terms of the franchise agreement being acceptable to the buyer;
  2. the most appropriate entity with which to purchase the franchised business and which delivers the greatest asset protection and taxation benefits;
  3. the terms of the business premises lease associated with the franchise;
  4. whether the assets of the franchised business are encumbered; and
  5. the terms of the franchise agreement. This document contains the key elements of the relationship between a franchisor and franchisee, including:
    1. initial and ongoing franchise fees;
    2. termination and default;
    3. supply of goods and services;
    4. other financial payments, such as marketing fees;
    5. restraint of trade;
    6. disclosure requirements;
    7. intellectual property;
    8. pricing; and
    9. dispute resolution procedures.

The form of the franchise agreement should reflect the practical commercial working of the business rather than be structured purely on legal considerations. Franchise agreements by their nature have enormous variety from one to the next and there are also a number of different permutations such as master franchise agreements, multi-unit franchise agreements, area development franchise agreements and joint venture agreements.
Prior to entering into a contract for the purchase of a franchised business, all prospective franchisees should seek legal advice from specialists in the franchising sector.

At Rouse Lawyers, we have developed a system of review and advice over a number of years that greatly assists prospective franchisees in understanding all the matters which need to be considered in their purchase, including:

  1. advising on the different structures available, and determining the most appropriate structure given the prospective franchisees’ position and goals;
  2. negotiating or drafting the contract of sale, taking into account certain conditions precedent such as the execution of the franchise agreement and business premises lease;
  3. liaising with accountants and other professional advisors;
  4. conducting a thorough review of the franchisor’s documentation;
  5. conducting a thorough review of the business premises lease;
  6. explaining the key terms of the documentation in plain English;
  7. alerting a prospective franchisee to any peculiar or unfair provisions that appear out of the ordinary;
  8. negotiating the terms of the documentation with the franchisor and/or the landlord; and
  9. managing the contract of sale up to settlement, including post-settlement matters such as payment of transfer duty.