Things To Consider When Buying A Franchise
Buying a franchise can be an appealing method of becoming a business owner. It allows you to be your own boss while providing certain benefits that are not available when starting a business from scratch, including:
- an established and proven way of running the business
- the use of a known brand with trademarks and patents already in place for your protection
- an estimate of the costs you will have to get the business up and running
- support and training from the franchisor and other franchisees
- access to products, supplies and supply chains that have already been tested and relationships with suppliers have already been established
- access to group purchasing power for products, supplies and advertising.
The Canadian Franchise Association has many resources to help you decide whether you want to purchase a franchise. Assuming you have decided that buying a franchise is the right move, and have decided on a franchise that interests you, the following are a few things to consider when buying a franchise:
- Carefully review and get legal advice on the Franchise Disclosure Document: In Ontario, the franchisor (the owner of the franchise) must disclose specified information to potential franchisees (the person considering buying the franchise) before the franchisee signs an agreement or pays any money. This document contains information about the franchise such as litigation history, bankruptcy information and financial statements for past years. It also contains information relevant to an offer of purchase and sale of a franchise such as expected costs, and details regarding the obligations of both the franchisor and the franchisee. An experienced franchise lawyer will ensure that you get the most information possible out of the disclosure document.
The disclosure document should include a list of franchisees with contact information. You can obtain valuable information about what it is like to run a particular franchise by speaking to someone else who has been where you are.
- Analyse whether buying the franchise will be profitable: Taking into account start-up costs, franchise fees (which vary significantly depending on the particular franchise), the ongoing costs of supplies and other expenses (such as employee salaries), which will vary based on the type of business, you need to determine if it will be possible to make a profit. Keep in mind that a franchise is a licence to operate the business for a specified amount of time – typically five to ten years.
- Financing: Assess your options in terms of financing the purchase of the franchise and take the costs of financing into account during your analysis of whether the purchase will be profitable.
- Renewing or selling the franchise: Understand what rights you have to renew your franchise agreement at the end of its five or ten-year term. If you don’t renew your agreement, you lose your rights with respect to the franchise. Some agreements place conditions on the ability to renew or assign (or sell) your rights so make sure that you understand what conditions you need to meet.
One of our Richmond Hill business lawyers can respond to any questions or concerns you have and can provide additional advice on things to consider when buying a franchise that apply in your particular circumstances. Contact us today. And please remember the content in this article does not constitute as legal advice and instead is intended to serve as a general overview on a legal topic.