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Key Questions to Ask a Lawyer When Buying a Franchise

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Buying a franchise with proven systems can often lead to success. However, like any investment, there are risks to note. Therefore, having a lawyer you can trust will help you minimise this risk. This article will take you through key questions you should ask your lawyer when buying a franchise in New Zealand. 

What Are the Costs Involved?

When buying a franchise, it will be helpful to inquire about the costs involved. Although you will need to discuss this with your accountant, you should first discuss this with your lawyer. 

While you probably know how much the business will cost upfront, ask your lawyer to help you understand any ongoing costs associated with:

  • royalties;
  • marketing and advertising costs;
  • training costs;
  • payroll expenses; and
  • financing options. 

How Are the Franchisor’s Relationships With Vendors and Suppliers?

You will likely need to purchase all supplies from specified suppliers as part of a franchise network. Your lawyer should look at all contracts you will have as a franchisee and consider their terms. Depending on the nature of the franchise, timely delivery by vendors is a potentially crucial issue.

If you are buying an existing franchise, you should ensure these contracts can be transferred as part of the sale and that you will assume the same terms if you take them on.

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What is Fair Value for This Business?

When purchasing a franchise, negotiate a price agreeable to both parties. As such, you should have your accountant check the business’ valuation regarding its tangible and intangible assets.

Some key questions to consider include:

  • Are the franchise’s assets, fit out and equipment in good order? 
  • Are the franchise’s operations and systems in good order? 
  • Is the amount of goodwill appropriate, given the reputation and earnings of the business?

It would help to look beyond the business’ revenue – or in the case of a new franchise, a comparative branch – when considering purchasing it. For example, is there evidence that the franchise is growing in popularity each year or declining? Is there evidence of consistent sales growth year-on-year if buying an existing branch? These questions will assist you in working out what fair value for the business is. 

Can I Sell the Franchise Before the End of the Term?

When buying a business, it is unlikely that you will be thinking about your exit strategy. However, it would help if you remember that circumstances change, and you may wish to sell the franchise sooner than expected. Selling a franchise is not always as straightforward as selling a more ‘standard’ type of business. This is because, in most cases, you will require the franchisor’s consent. 

It would help if you asked your lawyer to explain the requirements for selling the franchise. For example, do you have to ask for consent in writing? Do you have to pay fees for selling the franchise early? Does the franchisor have to approve a new franchisee? 

What Are the Premise Arrangements?

There are two main ways that leasing arrangements are structured in a franchise agreement:

  1. the franchisee leases directly from a landlord; or
  2. the franchisor holds the lease and grants the franchisee a licence or sublease to occupy the premises.

If you enter into a lease with the landlord of the premises, you must be aware that you have separate obligations to your landlord and to the franchisor. For example, you will be responsible for negotiating the lease terms and meeting your requirements under the lease, including paying rent.

Alternatively, if the franchisor holds the lease, they might request that the franchisee provide security for performing the tenant’s obligations.

It would help if you had your lawyer review any relevant lease documents, regardless of the nature of the lease arrangement. They can help you ensure that you know the terms and obligations of such an arrangement and point out any red flags to avoid.

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Key Takeaways

Like any investment, there are risks involved with buying a franchise. However, having a lawyer review and explain the documents will help you make an informed decision before signing the franchise agreement. When buying a franchise, some key questions you should ask your lawyer include: 

  • What are the costs involved?
  • How are the franchisor’s relationships with vendors and suppliers?
  • What is fair value for this business?
  • What are the premise arrangements?

If you need assistance deciding if buying a franchise is suitable for you, our experienced franchise lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.

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