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One option when starting a business is to purchase an existing business in the form of a franchise. Rather than starting up your own business and brand, you are purchasing an existing franchise. Usually, the franchise will have all of the aspects of the business already established, so when you buy a franchise you are also buying that system to operate your business.
What happens when you want to invest in a franchise?
To invest in a franchise, the franchisee (you) must first pay an initial fee for the rights to the business, training in the business model, and the equipment required to operate the franchise to the franchisor (owner). After the business is set up, the franchisee will generally pay the franchisor a regular royalty payment (such as a percentage of gross sales or fees) for the continued use of the franchise model. These payments are generally on a monthly or quarterly basis. When you buy a franchise you are effectively buying a brand that should be protected by a registered trademark and gives you the right to trade using that trademark.
After the franchise agreement has been signed, the franchisee will open a franchise business which replicates the business model of the franchisor. Generally, as a franchisee you will not have as much control over your business as you would over your own business so you need to be prepared to do things the franchisor’s way, not yours. Usually, the franchisor will assist the franchisee where necessary to ensure that the reputation of the business trademark and model are maintained.
Control of the franchise
Generally, the franchisor will require that the same business model is used by all the franchised businesses. This may include using the same uniforms, business processes, and signs or logos particular to the business itself. These help to identify the business and keep the brand consistent to the outside world. The franchisee should remember that they are not just buying the right to sell the franchisor’s product, but the right to use the successful business process of the franchise.
Often the franchisee will pay an advertisement fee to the franchisor so that consistent advertising can be utilised to a larger audience rather than each franchisee attempting to advertise their business on their own. For example, a franchisee may only be able to afford to advertise in a limited area around their business due to the cost. Where multiple franchisees pool their money together, they can often afford advertising that reaches a much larger market and is therefore more beneficial to all of the franchisees as a whole.
While there are many benefits to investing in an already successful franchise business, there can also be drawbacks. As with any investment, you should do your research thoroughly before you make any purchasing decisions. Often, the franchisor will place a number of restrictions on how you operate the business and, as such, you should ensure that any franchise agreement is fully reviewed by a competent lawyer who can advise you in relation to your rights and obligations under it. It is also critical that you obtain advice from your accountant and financial planner to ensure that you are able to properly operate the business from a financial standpoint.
Purchasing a franchise business is an important business decision. You need to give serious consideration to what you signing up for and whether you are getting the most out of your investment. Importantly, you need to take advice from financial and business advisors on whether the franchise is viable, and from lawyers on the legal side of the franchise business.
This is an extract from The Business Legal Lifecycle by Jeremy Streten – designed to guide and empower you with the knowledge you need to successfully navigate your business journey.