Buying a franchise is one way to acquire or start a business, which is one of the most important decisions you will make in your life.
Most people realise that there are significant financial risks in starting or buying a business. There is also a personal cost as running your own business may involve added responsibilities to an employed position and longer hours.
If you are considering buying a franchise you may wish to benefit from a developed franchise system or business model created by the franchisor. There may be real benefits in buying a franchise rather than starting your own business and having to create the business model and systems yourself.
It is important however that you do not forget that owning and running any business involves financial risk. Several of those risks are the same for any business such as the risk of business failure which may expose your personal assets as well as your business assets to creditors and eventually lead to bankruptcy. Another example is the risk of commercial disputes, staff problems and legal compliance issues.
There are some additional risks that apply specifically to franchised businesses. Some of these risks arise from terms that are commonly found in franchise agreements such as:
- preferred supplier terms;
- approved product terms;
- terms that allow the franchisor to unilaterally change the contract;
- terms that give the franchisor control over the franchisee’s cash flow;
- terms that allow the franchisor to compete against the franchisee;
- terms that give the franchisor a security over the franchisees personal assets.
There are other terms that give rise to commercial risks. These are only some of them. The nature of the commercial risk that arise from such terms varies based on the nature of the franchised business, the nature of the franchised system, and the arrangements the franchisor has with third parties.
The Franchising Code of Conduct contemplates that prospective franchisees will either seek legal, accounting and financial advice or at least make an informed decision not to obtain such advice. Unless you really understand the commercial risks of buying a franchise it may be an initially poor business decision not to obtain legal advice before making a final decision whether or not to buy a franchise in which you are interested.