14 things to check before you buy a franchise
Buying any business is a serious matter. When you buy a business you may use a business broker or purchase it direct from the vendor. It is important to buy a business as a going concern for GST purposes and you must do thorough due diligence.
14 steps to getting your franchise purchase right
As part of the due diligence process you should be mindful of the following:
- Engage an accountant to examine the books and records of the business.
- Test the financial representations made by the vendor.
- 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 contract and discuss them with your solicitor before you sign it. Is there to be a restraint of trade on the vendor? If the vendor is a company, are the directors personally bound?
- Check the registrations, licences or permits held by the vendor.
- Is the business a franchise? Check the franchise agreement and what fees are payable and what consents are needed. You should obtain legal advice.
- Check the provisions of the lease and obtain legal advice before you sign it. What consents are needed from the lessor? Is there a personal guarantee required?
- 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 rates, insurance and other outgoings.
- If employees are to remain in employment, check employment contracts, the method of adjusting salary, annual leave, superannuation, etc. and how this is dealt with in the agreement.
- Seek legal and accounting advice about choosing the most appropriate operating structure - this may have 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.
If you purchase a business through a business broker, the broker would prepare the agreement for sale and purchase. If you require finance, then the finance condition must be completed and the due diligence clause should allow at least 15 or 20 working days for you to satisfy yourself in relation to all aspects of the business.
It is helpful and prudent not to sign the agreement as purchaser until your solicitor has perused and checked it. You should engage a solicitor with experience in business sales and franchising.
In relation to the draft agreement, you must check that it includes the following terms:
- A reasonable period for you to carry out due diligence. Documentation requested by the purchaser during due diligence should be supplied wherever possible and a documentary record maintained.
- Conditions and an appropriate period for obtaining landlord approval to the assignment of the lease and franchisor’s approval of transfer (whether by assignment or grant of a new Franchise Agreement).
- Make sure that any restraint of trade provision is not so restrictive as to prevent you from doing your intended work or business after you have sold your business.
- Other conditions as may be advised by your solicitor as appropriate in the case of your business.
Also ensure that a schedule of all plant, fittings and equipment is included in the agreement. Your solicitor will carry out a search of the vendor company on the Personal Property Securities Register (PPSR) and you, as purchaser, should require that any security over any assets included in the sale is removed before settlement.
Typically such security will exist over trading stock and over assets the subject of hire purchase or similar arrangements.
You will also need to check the employment contracts of employees of the business and their entitlements and the vendor should be responsible for all termination payments including leave entitlements.
In summary, purchasing a business is a serious matter. It is important that you engage the services of an accountant and an experienced lawyer. Once the agreement has been signed it is too late to go back and negotiate missing provisions or required protections.