Most people who call me about a franchise have already decided they want it. The brochure is good, the meeting with the franchisor went well, and what they want to know is whether the contract is okay.
By the time the agreement is on the table, the decision that matters has usually been made. Whether this business, at this price, on these terms, is the right move for you is a separate question, and it is worth answering first before you are invested – legally, financially and emotionally.
Below are seven questions to work through before you sign. Each one is framed to produce something you can check: a number, a document, a name, or a sentence someone else is willing to put in writing. The process of buying into a franchise is longer and more involved than most people expect. When I advise incoming franchisees, one of my most important jobs is making sure that this information is available so that the franchisee can ultimately make the most informed decision possible. If you are taking on a new site rather than buying an existing one, questions 3, 5 and 6 become questions about the franchisor’s figures and the outlets already trading.
In the end you will feel much clearer in your understanding of what you are signing up for, and you can make your next decisions fully informed.
A note on timing
Some of the information needed to answer these questions arrives with the statutory disclosure pack but the commercial detail sits outside it. The vendor’s financial statements, the owner’s actual hours and the reason for the sale usually have to be requested and the law doesn’t require their disclosure. Your lawyer will be reading the franchise agreement to work out what it obliges you to do, and is well placed to source the rest. The practical move is to ask early, while the franchisor still wants your business.
1. What is on the list of what I am buying, and what of it is still mine at the end of the term?
Ask for an itemised schedule: equipment, fitout, stock, goodwill, customer list, territory, brand rights, systems access.
Then strike out everything that reverts to the franchisor or simply stops when the term ends. What survives the strike-through is what you can sell to somebody else one day.
If very little survives, you are buying a period of trading rather than an asset.
2. What is the total cash required to open the doors and keep them open until the business pays for itself?
Work out one total number, built up from its parts: purchase price, initial franchise fee, fitout, equipment, opening stock, training, professional fees, bond and bank guarantee, and working capital to the month the business breaks even.
Compare that number to the funds you actually have, not the funds you could raise if everything went well.
The advertised price is only one line in the whole calculation.
3. What does the business earn after paying a market wage for the work the owner does?
Ask for the profit and loss statement, then add a line item for what it would cost to employ somebody to do the owner’s job (if you aren’t sure of the market wage, check industry award rates, job board averages like SEEK, or ask your accountant for a benchmark).
Read what is left as a return on the cash in question 2.
If the profit disappears once that wage goes in, the business is a job with a purchase price attached.
That can still be a reasonable thing to buy, but you should know what you are signing up for.
4. What will I pay the franchisor over the course of the first year, and what do I receive for it?
Work out the figure in dollars and as a percentage of forecast revenue: royalty, marketing levy, technology and software fees, training charges, and the margin built into any compulsory supply arrangement.
Then price the same things independently.
Marketing, systems, training and supply can all be bought on the open market. The franchise fee is worth paying where the brand and the customer flow it brings are worth more than the difference. Even approximate figures here can be very revealing.
5. How many hours a week will I be working, on which days, and what is my effective hourly rate?
Ask for the current owner’s roster and their actual hours, not their estimate of them. Who opens, who closes, who covers a sick shift.
Convert the profit figure from question 3 into a weekly figure, then divide it by the total weekly hours worked. Compare the resulting hourly rate with what you would be paid for the same hours somewhere else.
The number is often the most clarifying one in the whole exercise.
6. Why is this one for sale, and what do the people who have left the system say?
Ask the vendor for the reason, and ask for three years of financial statements and BAS to test it against. Ask how long the business has been on the market.
Then use the list of former franchisees in the disclosure document and call some of them.
Put one concrete question to the people who have left: Did you sell the business, or hand it back, and what did you take out?
If you can get these answers, they will tell you more about a system than any brochure will.
7. What are my walk-away numbers, and did I write them down before I started negotiating?
Write a dated note before you make an offer: maximum price, minimum acceptable income, maximum hours, maximum capital you are prepared to put at risk, and the number of years you need to hold the business to get your money back.
Read it again on the day you are ready to sign.
If you find yourself explaining why one of those numbers no longer matters, that is worth paying attention to.
Most bad purchases are not made by people who ignored the numbers. They are made by people who revised what they were willing to settle for.
Practical considerations
This might look like a lot, but you are not gathering it alone. Your lawyer will already hold some of these documents, and can request the rest.
What your lawyer cannot do is tell you whether the numbers work. That is a question for you and your accountant. The legal job is getting accurate information into your hands early enough for you to use it, and telling you which questions have not been answered.
These seven questions and the legal review belong together. The detailed review of the franchise agreement, the disclosure document, the lease or occupancy licence, the guarantees and the exit provisions is the subject of Part 1 of this series. The work is most useful before a deposit is paid, while the terms can still be negotiated and walking away is still cheap.
If you are considering buying into a franchise, get in touch for an obligation free chat.
Disclaimer: This article provides general information only and is not a substitute for legal advice. Every franchise transaction is different, and you should obtain legal and financial advice about your particular circumstances before entering into a franchise agreement or purchasing a franchise business.