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12 TIPS AND TRAPS FOR FRANCHISE BUYERS

by Michael Bright,
last updated 23/06/2017

Franchise lawyer Michael Bright explains how to get off to the best possible start in your new business

click images to enlarge

Aa franchise is a legal contract and you have to abide by it or possibly lose the franchise. That’s a good reason why you should always consult a franchise-experienced lawyer before you sign anything.

Over the years, though, the odd conclusion I’ve come to is that although the legal detail of the agreements is important, the areas that most often cause grief are the commercial issues. Usually, when a franchisee fails or gets into strife with their franchisor it’s those other issues that are the underlying cause. Here are some suggestions for franchise buyers that could avoid problems later on.

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1. Don’t mentally commit to a franchise opportunity until you’ve thoroughly investigated it.  The initial stage of finding out about a franchise is exciting. The franchisor will give you lots of attention and do all they can to attract you to their system. You will learn about the benefits of being part of the franchise and eagerly imagine life as an independent business owner. You realise there will be some challenges but with your energy and skills and the nice people in front of you, you’re sure to overcome them – right? Well …  maybe. Unfortunately, some franchisees get so enthusiastic in this early stage that they don’t put enough effort into properly researching the business. Remember that during this time, the franchisor is a salesman. Be sceptical about what the franchisor tells you. Get as much information as you can to help you independently assess the opportunity and whether it is a good fit for you.

2. Use advisors who specialise in franchising. This may sound self-serving, but franchise specialists are less likely to waste your time and money asking pointless questions. Ultimately, they can also help you make a smarter decision by knowing which issues really matter and which are less important.

Every franchise lawyer has stories about new franchisees who make up their minds too early and won’t listen to any advice. Every franchisor has stories about non-specialist advisors who either ruined an opportunity or charged far too much, due to their own lack of understanding about franchising. Taking good legal and accounting advice isn’t just ‘ticking the box’ to satisfy the franchisor’s requirements – it’s essential for your future.

Give your lawyer and accountant the opportunity to teach you things. They won’t have all the answers, but they can help you ask great questions as you work through your ‘due diligence’ investigation process.

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3. The financial figures, operational details and other hard data are important, but don’t focus just on those: it’s also important to assess the character of the franchisor. To help maintain standards, the franchise agreement will be very one-sided in favour of the franchisor. This imbalance isn’t bad in itself (provided it doesn’t go too far), but it can be used responsibly or irresponsibly. Whether the franchisor uses their power for the overall benefit of everyone in the franchise network or whether they abuse it largely depends upon their character and your ability to build a strong relationship with them.

We suggest you ask existing franchisees a few questions that target the franchisor’s people skills and motivations. How effectively does the franchisor communicate? How do they react when their ideas are challenged? Can they admit if they are wrong? Do they respect others’ opinions? Do they make good use of the ideas and innovations that franchisees come up with? Do their marketing initiatives actually increase profits, or just sales? What does the franchisor do to support a franchisee who suffers a personal emergency? There are lots of questions you might want to ask franchisees – Franchise New Zealand has previously compiled a handy list of 50 questions to ask franchisees.

When you get the answers, listen not just to what is said but also how it is said. Do the answers come quickly or enthusiastically, or is there a sense of reluctance, awkwardness or omission? After a few discussions like this, you should...

 

This article appears in full in the latest issue of Franchise New Zealand magazine (Year 26 Issue 2). Read the entire article in the digital magazine or, if you live in New Zealand please send for your free print copy.

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