When buying a franchise great care should be taken. Any franchise purchase will usually involve substantial capital and if borrowing from a bank then security, usually in the form of a mortgage over your house, will be required.
If buying a franchise, check whether the franchisor is a member of the Franchise Association of New Zealand (FANZ) because if they are, the franchisor will have to comply with the code of practice and code of ethics of the FANZ. The code of practice requires a franchisor to supply a disclosure document to a prospective franchisee and the franchise agreement must contain a dispute resolution provision and a seven day cooling off provision.
Before purchasing any franchise you should complete your due diligence which basically means asking the right questions of the franchisor, receiving and perusing relevant information, going to your own independent accountant and lawyer and ascertaining all material facts. In completing your due diligence you should consider all of the following:
- Engage an accountant to examine the books and records of the business.
- Test the financial representations made by the franchisor.
- Check whether the business will be able to service your proposed borrowings and still leave an adequate return.
- Check the terms and conditions of the franchise agreement and discuss them with your solicitor before you sign it.
- Check the licences, registrations and any trade marks held by the franchisor.
- Check the franchise agreement and what fees are payable and what consents are needed.
- Check the provisions of the lease and obtain legal advice before you sign it. Is a personal guarantee required? What consents are needed from the lessor?
- Check the inventory of chattels, plant and equipment and their condition. Are there any encumbrances to be discharged?
- Check for restrictions as to the use of the business premises.
- Check the insurance, rates, and other outgoings.
- Check employment contracts, the method of adjusting salary, annual leave, superannuation, and how this is dealt with in the agreement if employees are to remain in employment.
- Seek accounting and legal advice about choosing the most appropriate operating structure as there could be taxation implications.
- Seek legal advice on the laws relating to consumer protection, credit, leases, employment law, patents and copyright.
- Seek expert taxation advice and be aware of GST, PAYE and FBT.
You can rely upon what a franchisor says or writes as being truthful and the Fair Trading Act 1986 provides remedies for misrepresentations. Most franchise agreements will contain a disclaimer clause which purports to say that a franchisee has not relied upon any statement, representation, inducement, offer or warranty made by or on behalf of a franchisor.
Some franchise agreements contain a separate disclaimer under which the franchisee, and if the franchisee is a company then the directors of that company, specifically acknowledge that any representations made by the franchisor will not be binding upon the franchisor. From a legal point of view this would not usually save a franchisor from litigation under the Fair Trading Act if any misrepresentations were made.
Stewart Germann, Franchising Lawyer at Stewart Germann Law Office . Stewart Germann Law Office are franchise lawyers and provide legal advice to franchisees and franchisors.