Buying a Franchise
Procedure for the Acquisition of a Franchise
Buying or selling a franchise is not a simple transaction. It is important to devote sufficient time and energy into properly preparing for the transaction. Preparation not only adds to the success rate of the business, but it will also ensure that all the parties involved will have a clear understanding what is to be achieved from the transaction.
A franchisee who is seeking to buy into an existing franchise must ensure that they do their research thoroughly before taking the next step.
Stage 2: Initial Negotiation Stage
It is important to ensure that all aspects of the transaction are kept confidential (such as pre-contractual discussions, disclosure of any confidential information etc.).
Drafting and negotiating the final sale documentation is a time consuming task. It is a good idea for the parties to identify the key terms that will form part of the principle agreement. This type of agreement can vary in detail and complexity and is sometimes called, ‘Heads of Agreement’, ‘Heads of Terms’, ‘Memoranda of Understanding’ or ‘Letter of Intent’. The terms of these agreements will usually set out:
- the price set out or mechanism for determining price
- the terms of payment of the purchase price
- how the transaction is to proceed
- the framework for the completion of due diligence
- issues involving warranties, personal guarantees or other security
- the nature and extent of post completion restrains on competition to be given by the vendor and any other director or stakeholder in the vendor;
- any conditions that must be met prior to the dealings (transfer of land, assignment of leases, franchise agreements, other material contracts, obtaining finance etc).
Stage 3: Due Diligence Stage
It is important to conduct a sufficient level of due diligence on the vendor franchisor’s network. There are numerous due diligence issues that are particular to franchise networks.
The terms of the existing franchise agreements should not hinder the acquisition or the sale of the business.
A purchaser franchisor should identify a number of key factors, including:
- whether or not each agreement has been properly executed and stamped
- that the vendor’s list of franchisees are consistent with what is specified in the agreement
- the commencement dates of each agreement
- whether there is any right to renew the existing agreement
- the fee structure under the agreement
- the law that is to govern the agreement (i.e. the law of Queensland)
- the dispute resolution mechanism
- identification of any personal guarantees and indemnities or any other securities is to be provided
- the provisions relating to breaches of the agreement and the right to terminate
- the conditions of occupancy
- any terms relating to the supply of goods or services from the franchisor to the franchisee
- any provisions relating to confidentiality
Disclosure Documents and recruitment process
The disclosure documents for the vendor’s franchise network should be carefully reviewed to ensure compliance with the Code.
The recruitment process also needs to be in accordance with the Code.
The operations manual will need to be reviewed for consistency with the franchise agreement and compliance with applicable laws.
Trademarks and Other Intellectual Property Matters
A purchaser will need to consider the ownership of the trade marks and other intellectual property to ensure that it obtains all the rights necessary to operate the business. This relates to any trade marks, designs, manuals and any other materials forming an integral part of the franchise
A purchaser needs to ensure that there has been express written assignment or an adequate license of the relevant intellectual property rights.
The success of the franchise network is largely dependent on the success of the relationship between the franchisor and its franchisees.
One way to measure the health of the existing relationship is to review franchisee complaints, mediation, arbitration and litigation records or to conduct an independent survey measuring franchisee satisfaction.
In the acquisition of a franchise network it is important to confirm the validity and sustainability of the revenue flow (e.g. initial fees, royalties, rebates, product and service sales).
It is important to ensure that the franchisees are up to date with their payment obligations.
Expert assistance is required to assess the figures and financial statements
It is important to ascertain the marketing funds that relate to the vendor franchisor’s network.
All expenditures should be verified as being in accordance with the rules of administering the fund (e.g. the franchisor often funds employee salaries and other administrative costs).
Property and Occupancy Rights
The extent of the due diligence in relation to the relevant properties depends on whether the leasing or other property rights is held by the vendor or its franchisees.
The purchaser franchisor will need to carefully review the terms of the leases, particularly in relation to assignment.
Employment and Industrial Relations Issues
It is important to identify whether there are any awards or agreements relating to the vendor’s employees.
Another point of interest is the issue of redundancy payments and the liability attached to those payments.
Depending on the nature of the franchise network, it may be necessary to review the product supply arrangements for profitability and enforceability issues.
Stage 4: Drafting and Negotiating Documentation
At this stage all of the conditions, precedents, assignment of property leases, warranties, guarantees and hold backs should have been attended to.
Stage 5: Completion
This is the point at which ownership and risk in the business and assets or the shares pass from the vendor to the purchaser. The date of completion should be made clear and the documentation that needs to be exchanged should be apparent. It is important to ensure that the process is followed through correctly.