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Whether you are looking to get into business or want to expand your current business, franchising is a great way to do both. Franchising is the process of licencing your business plan to another entity in exchange for a periodic franchise fee. It allows you to take an already proven business model and apply it to another location. If you are looking to grow your business, franchising is a great way to do this without using your own labour or capital. A franchise agreement is a legal document underpinning the relationship between the individual or business buying the franchise (“the franchisee”) and the person licencing the business (“the franchisor”). This article will discuss some of the key questions you should ask your lawyer before signing your franchise agreement.

Questions for the Franchisee

What Is the Best Ownership Structure for My Franchise?

When you are buying a franchise in New Zealand it is important that you choose the right ownership structure. If you buy a franchise then you can set up one of the following business structures to hold the franchise:

  • sole trader;
  • partnership; or
  • company.

If you decide to set your business up as either a sole trader or a partnership, you are likely to have more control over your business and they are generally easier to set up. However, you also have unlimited liability, which means that your personal assets may be exposed if your franchise goes bankrupt. Your assets are more likely to be exposed if you have given personal guarantees to your creditors. A company, on the other hand, could mean that you relinquish some control of the business if you decide to get investors on board. But in the case of a company, you have limited liability so only the company assets can be taken if your business goes into liquidation. 

What Are My Costs Under the Franchise Agreement?

This question will depend entirely on how your financial agreement is structured. There will be an initial investment cost which is the cost of the business when you buy it. Most franchises then have an ongoing franchise fee that is usually based on a percentage of your revenue. Some franchisors may also make you buy stock or plant through the franchisors as they may be the sole provider of this good. There could also be advertising costs that you may have to contribute to as part of the broader franchise system. 

Additionally, it is important to note that you may have contingent liabilities and payments in the event that the business fails. These payments could include:

  • paying off bank loans;
  • ongoing payments under franchise agreement; and
  • ongoing obligations of lease agreements.

It is prudent to ask your lawyer to look over your franchise agreement to see if there are any hidden costs that you may have missed. 

Questions for the Franchisor

Have I Complied With All My Obligations Under the FANZ Code of Practice?

Most franchisors should be a member of the Franchise Association of New Zealand (FANZ). Being a member of FANZ allows you to use their resources, and it makes you a more reputable franchisor. All FANZ members must comply with their Code of Practice. The code of practice sets out what should be put in your franchise agreement and how the relationship between the franchisee and franchisor should be. The code of conduct enforces the following provisions in the franchise agreement:

  • a cooling-off period;
  • a disclosure document; and
  • dispute resolution.

Have I Put Together a Comprehensive Exit Plan for My Franchisee?

The part that most people overlook in a franchise agreement is the exit plan. You may think that an exit plan is more important for the franchisee than the franchisor. However, in some cases, it can be the opposite. This is because some franchisees may struggle to sell a business that they do not want to be in, and this brings the quality of the franchise system down. When drafting your franchise agreement, make sure that there is a way for the franchisee to exit the business efficiently. This may come by including a first right of refusal in which the franchisor has the first right to buy back the franchise. 

Key Takeaways

As with any business decision, it is important that you consult a lawyer before coming to any conclusion. The last thing that you want is any hidden surprises in your new business venture. Your lawyer will be able to draw up a foolproof franchise agreement and can review any other legal document that comes your way. If you need legal assistance with purchasing a franchise or franchising your own business, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Is setting up my franchise in a company the best way to protect my assets?

Setting up your franchise in a company does help you protect your assets. You could also put your personal assets in a trust to keep them separate from your business dealing

Can I sell my franchise to anyone?

This depends on the franchise arrangement with your franchisor. It is common for the franchisor to overlook the sale and purchase agreement with the new party.

As a franchisor, do I have to become a member of FANZ?

No, you do not have to become a member of FANZ. However, it is highly recommended as it allows you to use their resources and become a more reputable franchisor.

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