In Part 1 of our 'Franchise buying guide', we explored franchise basics and making the right choice. This second instalment focuses on crucial questions to ask before making your investment. Building on the foundational knowledge from Part 1, we'll guide you through the due diligence process and key considerations when evaluating franchise opportunities.
Our franchise legal team is ready to help you navigate these important questions and ensure you're making an informed decision.
Contents:
- When buying a franchise, what questions should I ask?
- What’s the process of buying a franchise?
- Can I buy a franchise from an existing franchisee?
- Can I buy a franchise from overseas? What is the process?
- Do you need a licence to buy a franchise?
- Can you buy a franchise online?
- What are the financing and funding options if you don’t have the upfront capital?
- Do you need a specialist franchising solicitor?
- What next? Moving from research to financing
When buying a franchise, what questions should I ask?
In Part 1, we looked at the initial considerations when buying a franchise, we looked at arguments for starting your own business versus buying a franchise. To really make an informed decision, you need to research franchises in general, the relevant industry and the brand you are interested in purchasing. You can find additional information about the process of buying a franchise and whether it is suitable for you at the ‘which franchise’ website. This website is a credible source for general franchising advice, as it’s the official online partner of the British Franchise Association.
If you are happy to be bound by certain restrictions, and you are confident you have the skills to operate a franchise, the next question will be which franchise should you buy.
A good start is to ask the franchisor’s existing franchisees. Some questions you might ask them:
- What was your total investment and what kind of costs did you face?
- Were the franchisor’s projections for your business performance accurate?
- Did the franchisor provide all the promised help and assistance for the start of the business?
- How useful was the support, training, and operations manual?
- Is there a high demand for the franchise’s goods or services?
- Is the franchisor prompt and efficient in dealing with problems?
- How much control is exercised by the franchisor in practice?
- Is the franchise providing a satisfactory return?
What’s the process of buying a franchise?
- Step one:Once you have chosen your franchise, you may ask the franchisor to sign an exclusivity agreement, so they do not enter talks to sell the franchise to another buyer during the due diligence and negotiation period. In addition to this, you should sign a confidentiality agreement to make sure the franchisors keep confidential anything you tell them during due diligence and negotiations.
- Step two:Make sure you have enough funds to pay for the franchise. If you will be getting a bank loan, make sure you have a firm commitment from the bank. You may have to pay a deposit at this stage.
- Step three:The next stage is to negotiate a draft franchise agreement that contains detailed terms of the arrangement. If the franchisor has a large network, they may have a standard franchise agreement as a starting point, though you may want to try to negotiate some of the terms. Your lawyer can help with this and advise you on your options if negotiation is not possible.
Terms that the franchisor will expect will typically include:
- The right to monitor your performance.
- A ‘restrictive covenant’ that you won’t compete with them during the term of the franchise.
- Various provisions protecting the franchisor’s intellectual property rights.
- Limitations on certain of your rights.
Terms which you will expect include:
- That franchisor provides you and your staff with training and resources on an ongoing basis.
- Details about who will be providing the goods and services needed to run the franchise, and what quality standards they should meet.
- A provision detailing the responsibility for marketing, advertising, and promotions.
- Whether you can sell the business and whether the franchisor has pre-emption rights (right of first refusal).
- The duration of the franchise agreement, whether you have the option of renewal, and how you can terminate early.
Find more information on what to look out for in our guide to reviewing a franchise agreement.
- Step four:After the franchise agreement is finalised, you will proceed to sign it. You may also have to sign other documents and agreements like a separate sub-lease of any premises.
- Step five:Upon signing, you will be able to start running the franchise, and convert any premises into a franchise outlet to begin the franchisor’s training.
Can I buy a franchise from an existing franchisee?
Yes, it is possible to buy a franchise from an existing franchisee if your franchise agreement allows it. This sale is known as a franchise resale. The franchisor must usually approve the buyer. One practical difference of buying from an existing franchisee is that you will be charged a premium on the franchise, as it has an added benefit of already being set up. You will have suppliers, trained employees, customers, and cash flow from day one. To account for this added value to the business, the price will be higher than buying a franchise from a franchisor. You may also be subject to additional fees such as a transfer fee. If you and the current franchisee are happy to proceed with the sale, and the franchisor has agreed, you will enter either a share purchase agreement or an asset purchase agreement with the franchisee, in addition to a franchise agreement with the franchisor. When all the documents have been signed, you should receive training from the franchisor to help you run your franchise. You will then be able to continue management and operation of the franchise.
Can I buy a franchise from overseas? What is the process?
Yes, you can buy a franchise from overseas through various methods. One option is purchasing from a UK franchisor who provides training and support remotely or through local subsidiaries. Direct franchising from the UK is uncommon due to tax and logistical challenges. Alternatively, buying from a master franchisee based in the overseas territory or entering a franchise development agreement are viable options. Additionally, you can purchase a franchise from a non-UK franchisor to operate in the UK, ensuring you have the necessary skills and confidence for success.
Do you need a licence to buy a franchise?
No, you do not usually need a licence to buy a franchise, unless the business itself needs a licence. Under most franchise agreements the obligation to comply with applicable laws and obtain the correct licence will be your responsibility. You can ask your lawyers whether you need a licence. Alternatively, check Government's licence finder to find out yourself.
Can you buy a franchise online?
Yes, you can find franchises online. The ideal place to look is on the British Franchise Association’s website. The BFA is a regulatory body that grants credible franchises with BFA membership status. To gain this status, the franchise will have passed a standards-based accreditation.
What are the financing and funding options if you don’t have the upfront capital?
If you have no money to buy a franchise, you may be able to borrow from a bank or other lender, assuming you are creditworthy. However, the franchisor may be reluctant to sell if they are not confident that you have sufficient funds to be successful.
If you are considering buying a franchise with financial support, alternative methods of finance include:
- Pulling equity from your home by using a home equity loan or a home equity line of credit (HELOC). If you wish to consider this option, you should seek the advice of a financial advisor.
- Finding a business partner who could provide finances.
Financing a business can be difficult. Find out what your business really needs a solicitor for and what you can do yourself at the financing stage.
If you are borrowing, you will need to show the bank your business plan. This should include various information such as an executive summary and detailed sections covering personal details, experience, franchise overview, operations, management, marketing, financial projections, borrowing needs, capital stake, and personal finances.
Do you need a specialist franchising solicitor?
Legal advice on buying a franchise is critical, particularly with your initial research (due diligence) and when reviewing and negotiating the franchise agreement itself.
Whether you are considering buying a franchise from an existing franchisee, exploring international opportunities, or seeking financing options, we always advise seeking legal advice so you’re your agreement protects your interests as well as the franchisors. Where an agreement is heavily in favour of the franchisor or non-negotiable, a solicitor can help advise you so you can make an informed decision on whether you wish to proceed. By asking the correct questions, understanding the process, and leveraging the benefit of legal advice, you can make informed decisions and set yourself up for success in your franchise project.
What next? Moving from research to financing
With a clear understanding of key operational questions, support frameworks, and performance indicators, you can thoroughly assess franchise opportunities. The next crucial step is getting to grips with the financial landscape of franchise ownership. Continue reading Part 3 of our series, 'Understanding costs and profitability', to explore the critical aspects of franchise financing.
For expert guidance on franchise agreements and negotiations, reach out to our specialised franchising lawyers who can help safeguard your investment.
