Buying into a franchise network has several advantages, such as the ability to operate an existing business with demonstrated success and goodwill. However, buying an existing franchise also comes with some risks. This article will take you through five tips to remember when buying an existing franchise business.
1. Franchisor Approval is Needed
In franchise networks, a franchise owner can only usually transfer the franchise with the franchisor’s approval. For the first step, you should make appropriate enquiries with the seller or franchisor to determine what you need to do to enter the franchise system. This might include having prior business experience or being of good financial standing. Accordingly, you should be ready to provide information, such as details of your financial information or business references.
Once the franchisor has approved you as a franchisee, you can proceed to purchase the franchise business.
2. Consider the ‘How’
When buying an existing franchise, consider how the purchase will occur. This can happen in two main ways, which the franchisor or the franchise agreement will decide.
Firstly, the business may be transferred or assigned by a deed of assignment or novation. In that case, the terms and conditions of the current franchise agreement would carry over to you. Such terms include the length of the franchise agreement and any provisions which apply to the current franchisee. You and the franchisor will need to sign the deed of assignment.
Another option for transferring a franchise is by signing a new franchise agreement. This is more common but may not necessarily mean you will get a longer franchise term. However, it does allow both parties to alter other terms of the agreement. You should review the new franchise agreement with extra care. Importantly, you must fully understand the business purchase and your obligations as part of the sale.
Continue reading this article below the form3. Do Your Due Diligence
When buying any business, you must do your due diligence, including checking that the business’ operations, finances and legalities are all in order.
One way you can do this is to request copies of the existing franchise agreement and any other business contracts that may be in place. If the franchisor is a member of the Franchise Association of New Zealand, you can also request a copy of the Franchisor’s disclosure document.
If the franchise you want to purchase is connected to a premises, you should also request copies of the lease agreement or the licence to the business premises. Ideally, the lease and franchise agreement terms correspond with each other. This can avoid the need to relocate during the franchise agreement term. You should undertake a thorough inspection of the legal documents as well as the condition of the premises.
4. Know the Advantages
Knowing and understanding the advantages of buying an existing franchise is useful. Firstly, buying an existing franchise may be easier to finance as the business will have prior revenue.
Another key benefit of buying an existing franchise is that it is already up and running. This is much easier than opening a new location from scratch, which would require you to:
- choose a territory;
- find a location;
- fit out a site;
- negotiate a lease;
- hire staff; and
- establish relationships with vendors.
Finally, you will have access to an existing customer base. This is particularly helpful when the business has a good reputation within the broader community, which is often demonstrated by its profitability.
5. Know the Disadvantages
While there are advantages to buying an existing franchise, you should also consider the downsides. Importantly, consider why the franchise is for sale in the first place. While it might be the case that they just want to move on or retire, you should be sure that you are not buying a poorly run business with a number of hidden issues.
To address this, some questions to ask include:
- What are the business profits in the last five years?
- How does the franchise’s performance compare with other franchises in different locations?
- Is the business in any current or pending legal proceedings?
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
If you want to buy into a franchise network, you might have considered buying an existing franchise. If you need assistance, 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.
Frequently Asked Questions
There are several advantages to buying into an established franchise network. For example, buying an existing franchise may be easier to finance. Another key benefit of buying an existing franchise is that it is already up and running. This is much easier than opening a new location from scratch. Finally, buying an existing franchise gives you access to an existing customer base.
First, you should consider why you want to buy an existing franchise instead of establishing a new one. You should also do your due diligence and know the advantages and disadvantages of buying an existing franchise. Finally, you need to consider if franchisor approval is needed.
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