How to minimise your risks as a franchisee

Franchisee Risk

Entering into a Franchise Agreement is a long-term commitment, and making wrong decisions can affect your bank balance, health and your relationships.

Before you sign on the dotted line, here’s some important steps you can take to minimise your risk.

Don’t rush

It’s a good idea to think strongly about whether you want to run a franchised business. Remember that in a franchise, you must follow the rules laid down by the franchisor. These can be strict, and you might find yourself dealing with more red tape than expected.

If you are opening a franchised business at a greenfield site, you also need to ensure that you have sufficient capital to start a business. This includes the ability to survive any losses you may incur while you build your franchise. Make sure that you have the capability to raise finance, and decide whether you are prepared to put your assets at risk.

Choose the right franchise

Whilst you may have your heart set on a particular franchise, there are many great options to pick from. Ask yourself:

What is the franchisor’s business background and experience?
How long has the system been in operation?
How many franchisees are there?
How many franchisees have started, sold or ceased to operate within the past year?
How extensive is the training provided?
What are the fees, both upfront and ongoing?
What support does the franchisor provide in exchange for your fees?

Before you sign a franchise agreement, the franchisor is required to provide you with a disclosure document. In an ideal world, this will provide answers to many of the questions above. A key part of any disclosure document is the contact details for existing and former franchisees. It’s a good idea to contact as many current franchisees as you can, and find out whether they are happy with their business. Be smart about this — don’t just contact franchisees recommended by the franchisor. Try contacting former franchisees, too. It can be instructive to find out why they left.

The more you investigate, the more comfortable you will feel. Don’t sign anything until you’re sure you’re going to be happy with your decision. The worst thing you can do is rush headlong into a dodgy deal. Don’t feel you need to rush to make the next training date or because someone else is interested in the area. Take your time and proceed at your own pace.

Choose the right structure

A lawyer and an accountant will help you choose the right structure for your business. Whether you enter into the franchise as a sole trader, partnership, company or trust, making the right decision from the outset is essential. Each structure is different, and the most suitable structure will depend on your circumstances.

Expect the best but plan for the worst. Investing in the right structure can limit your liability and help protect your personal assets if the business goes belly-up. The right structure can also help with tax minimisation if your business becomes a roaring success.Each structure has different taxation consequences.

Take detailed notes

Never rely on a promise or representation regarding the potential for the business without doing your own research and investigations. If a franchisor makes a promise about something which is not specified in the franchise agreement or disclosure document, make sure this is recorded in writing. A common way of dealing with promises is to sign something called a “prior representations deed”, which details exactly what promises are going to be relied upon.

Communicate

Remember that franchising is not a business – it is a way of doing business. The franchisor has a proven system for success and has opted to duplicate that system by creating franchises. Don’t assume that because a franchise is your business, you can run it any way you want. If the franchise agreement restricts your products, for example, you must comply with those restrictions. Making changes to your business can also require getting the franchisor’s prior approval in writing.

Adhere to time limits

If your franchise agreement allows you to renew for a further term, diarise the time limits. The timeframes given to you are probably strict. If you miss the timeframe, then the franchisor has no obligation to grant you a renewal. It’s also important to remember to renew your lease. After all, you don’t want to renew your franchise agreement only to find that you don’t have a store to operate from!

If you receive a notice from your franchisor claiming that you’re in breach of your agreement, act on it immediately. Breach notices almost always come along with a timeframe. Whether it is paying your outstanding fees or speaking to your lawyer about your options, if you don’t comply, your franchisor could terminate the franchise agreement.