Buying a franchise business

Buying a franchise is considered one of the safest routes of starting a business at a reduced risk. Although there are no specific legal requirements regarding the buying and selling of franchise businesses, those who are considering doing so still need to take several factors into consideration. rradar solicitor Chizoba Chukelu takes a closer look at the subject.

What is a franchise?

You may be shopping, eating or drinking coffee in a franchise business right now. Figures from the British Franchising Association show that there are about 935 franchise systems in operation in the UK. Within those systems, there are 48,600 franchised units and 710,000 people employed. Franchising contributes about £17.2 billion to the UK economy. There are about 20,000 franchisees and 36% of them run multiple units.

What does the law require?

There are no legal requirements or restrictions under English law with regards to sale and purchase of franchise business. This is entirely a contractual matter for the parties to decide.

Standard franchise agreements usually make provisions for sale subject to the franchisor’s consent. The resale could be a sale of a company or sale of the assets of the franchisee’s business. When buying an existing franchise business from a franchisee, you will be dealing with two parties - the franchisee from whom you are buying the business and the franchisor of that franchisee.

In addition to the share purchase or asset purchase agreement, the fully operational franchise agreement would be terminated, and the new franchisee enters into a new franchise agreement with the franchisor. Both the outgoing and new franchisee may be required to pay a franchise transfer fee.

The process of buying an existing franchise is the same as a franchise sale. The only significant difference is that the buyer gets to pay a premium for buying an existing franchise. The added benefits include training, support and an established business accounts and clients base. It is quicker and easier to run with the established clients and staff.

Another advantage of buying an existing franchise business is that replies to due diligence questions can be corroborated by the franchisor. They may not be able to provide a formal assurance on the business but should have records on its performance and prospects.

What to consider

It is obviously more expensive to buy an existing franchise business as you are taking over both known and unknown risks. In addition to having a good understanding of why the business is being sold, these are some of the things to consider when taking over an existing franchise business:

• Request detailed information about the business outside the prospectus provided to enable you make a final decision. Information should include the business accounts, full details of staff, equipment both owned and leased, the business premises, etc.

• Understand the business location and territory, the marketplace within which the business operates, any known competitors, success of fellow franchisees in the industry and the level of support available to franchisees.

• There may not be room to negotiate a franchise agreement but do not be afraid to seek clarification if you are unsure of any provisions in the draft document before signing.

• Watch out specifically for restrictions on transfer and succession. Seek independent financial and legal advice with regards to the business valuation and the legal structure.

There is so much to consider when buying an established franchise business. It has both advantages and disadvantage. Thorough evaluation of the business and cost is therefore extremely important.

rradarstation

rradarstation is a resource available through the AXA MLP where policyholders can access rradar’s legal advisory team over the phone or by email and web portal that provides over 1,000 articles, step by step guidance sheets, forms, sample letters and templates to download relating to running a commercial business.