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So, you are someone who wants to get into business and think franchising is the best way to do it. Franchising is a structure in which a business (‘the franchisor’) can licence their business plan to another entity (‘the franchisee’) in exchange for periodic franchise fees. Franchising is a popular way for people to get into business because they can use an already established brand and duplicate it in another area. This article will outline a few legal tips for new franchise owners, to make sure that the process of buying a franchise goes smoothly.

Undertaking Due Diligence

Before you buy any business, you have to make sure you have done your due diligence. Due diligence is the investigation into a business’s financials to confirm that the business details are correct. Due diligence is made a bit easier when buying a franchise because, in most cases, you will be given a franchise disclosure document. The franchise disclosure document will outline the business’s financials and give you a report on the ‘health’ of the business. However, it is still important to conduct your own independent due diligence. This could include testing the market or talking to current employees.

Understanding Your Franchisee Obligations

New franchise owners must be aware of their obligations when buying a franchise. Any obligations that the franchisor has put on you will be outlined in the franchise agreement. The franchise agreement is the legal document that outlines your relationship between the franchisee and the franchisor. Some franchise agreements may contain such wide disclaimers for liability on the part of the franchisor that they are not actually under any obligations. In some cases, these disclaimers could exclude the franchisor from liability for a breach of the franchise agreement. This is why it is always prudent to have a lawyer review your franchise agreement to ensure there are no ‘hidden’ clauses.

Termination

Another obligation that franchise owners, such as yourself, should be aware of is that you cannot walk away from your franchise. Some franchise owners may think that if things are going badly, they can abandon the business and forget about it, but this is not the case. Unless it says in your franchise agreement that you can walk away, you are committed to the franchise until expiration unless you decide to sell the business and your franchisor approves the sale.

Exit Plan

Even though you may not be thinking about selling your business, some franchise agreements will have a predetermined exit plan. This means that you may not be able to sell the business in the way that you want. For example, some franchise agreements will make the franchisor have the first right of refusal. This means that if you were to offer your franchise to another party, your franchisor is able to buy your franchise on the terms negotiated with that other party. This is important to remember if you are looking to sell to friends or family at a discounted price, as your franchisor will be able to buy at that discount.

Keeping Up With Employment Law

As a business owner it is your responsibility to keep up to date with the relevant laws that affect your business. The main set of these will be employment laws. Any employer has to familiarise themselves with their obligations under this legislation. There have been cases where franchise owners have broken employment laws and, as such, have been fined. The consequence of this is that the reputation of the franchise as a whole is lowered, and your relationship with your franchisor may suffer. Relevant laws you should be aware of include:

  • minimum wage;
  • parental leave;
  • annual leave; and
  • staff training.

Tax Obligations

As with any business, you must keep up with your tax obligations. Different taxes that you may need to think about include:

  • company tax;
  • PAYE;
  • GST; and
  • non-Resident withholding tax.

It is important that you know which taxes are relevant to you and how they might affect your business. The last thing you want is a hefty tax bill after you have already accounted for your expenses. To stay on top of your tax obligations, think about hiring an accountant or using a tax advisor.

Key Takeaways

As with any new business venture, by being aware of the above tips, you can make buying a franchise smoother. Being meticulous before you start the process of buying your franchise is important, as you will want to conduct your own due diligence. It is also critical to know your obligations under your franchise agreement after you sign. This ensures that your franchise has the best chance of succeeding. Finally, keep up to date with the current laws that affect your franchise and your relevant tax obligations. If you are looking to buy a franchise and need legal advice, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Does the franchisor have to provide me with a franchise disclosure document?

No, but if they are a member of the Franchise Association of New Zealand, then they must under their code of practice.

If I decide to sell my franchise, can I sell it to anyone?

No, your franchisor will have to approve the purchase and approve the new franchisee coming on board.

Will the franchisee or franchisor be held liable for breaking employment law?

The franchisee will be held liable for any breaches of employment law if the breach happens in their franchise. 

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