I am buying a franchise. Do I need to worry about the structure I use to own and operate the franchise?
A franchise is one way of running a business but like any business you need to consider the structure you use to acquire and operate the business. You may use a company, a trust, a partnership or acquire and operate it as a sole trader.
I wish to use a company to acquire a franchise because I wish to protect my personal assets. What if the franchisor asks me to sign a personal guarantee?
If you sign a personal guarantee you may be liable for the debts and obligations of your company under the franchise agreement. If your company cannot pay franchise fees or other moneys it is obliged to pay the franchisor then you may be responsible for these debts.
Franchisors normally require a personal guarantee from the directors of franchisee companies. This is a matter that you can negotiate about with the franchisor. You should never agree to sign a personal guarantee without obtaining advice from a lawyer.
One reason is that the prospective franchisee does not see value in paying money for legal advice on a franchise agreement. The prospective franchisee may believe he or she understands the obligations and rights under the franchise agreement and already face significant costs to start a business. Obtaining legal, accounting and financial advice may be seen as an avoidable expenses.
The price for a franchise may vary significantly between a relatively small amount and a large amount that requires a prospective franchisee to borrow some or most of the purchase price. A prospective franchisee may consider that if they are not paying a large sum for a franchise that the cost of advice from professionals is not justified. However, even if the purchase price for a franchise is low, prospective franchisees should consider the extent of future liabilities which may be many times higher than the purchase price of the franchise. Many disputes between franchisees and franchisors occur because of insufficient investigations by the franchisee and a lack of understanding of the franchise business and franchise agreement. Proper investigations should include obtaining legal advice.
It is not compulsory. The Franchising Code of Conduct imposes on franchisors an obligation on franchisors to provide franchisees the choice to obtain legal, accounting and financial advice or decide not to do so after at least considering whether it should be obtained. The decision not to obtain advice must at least be a considered decision. In most instances not obtaining advice increases the risk of business failure, problems and disputes and is not a good way to start a new business.
This publication is only intended as a general overview of issues relevant to the topic and is not legal advice. You should not rely on it in place of legal advice. If you need legal advice, you should obtain legal advice from your lawyer. If you have any questions, please contact us firstname.lastname@example.org.