[EP 282] Navigating Franchise Deals: Top Tips & Expert Insights on Buying a Franchise

Transcript below!

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Joanna Oakey [00:00:25]:
Hi, it’s Joanna Oaker here. And welcome back to The Deal Room podcast, a podcast proudly brought to you by our commercial legal practice, Aspect Legal. Now, today we have another episode, digging into the world of franchising. This time we’re digging into the buy side story as you’ll hear from our guest and Aspect Legal’s very own franchising guru, Alan Prasad. This side of the Deal room requires a different approach to the sell side. We talk about what you need to think through in this context. Is it the right business for you? Are you the right owner for the franchise? And what do you need to do to put yourself in the position that you’ll be approved as a franchisee? Alan shares some of the key documents and what to look for when you’re considering a franchise for sale. Some costs, including some less well known upfront and ongoing fees, you might need to consider and more.

Joanna Oakey [00:01:26]:
I can’t wait to share this episode with you. So without further ado, let’s dig in. Alan, welcome back to The Deal Room podcast. It’s an absolute pleasure to have you back on the show.

Alan Prasad [00:01:37]:
Thank you, Jo. It’s an absolute pleasure to be here. Thanks for having me.

Joanna Oakey [00:01:41]:
Oh, my pleasure. Always. Okay. All right, now, so in one of our last recent episodes, we talked about the issues relating to selling a franchise. Now we swapping sides of the desk and looking at buying a franchise. So why don’t you take it away? Alan, you’ve dealt with, I know hundreds of businesses, franchise businesses, in acquisitions and sales. So when we sitting on that side of the fence, the side of the buyer, what is it that we need to be really aware of in buying a franchise?

Alan Prasad [00:02:19]:
Look, essentially, when you buy a franchise, it’s almost equivalent to buying your own business, but with additional requirements that the buyer needs to be aware of that is imposed by the franchisor. So when we say about usual purchasing of the business. So the buyer would need to still understand what structure that they will be using to buy the business. Do they have ABN GSD registration? Do they understand the tax obligations? Are they able to meet the financial requirements for the business that they purchase? Because note this, under the franchising code of conduct, if the buyer is not able to meet the financial requirements, then that is a ground for the franchisor to withhold consent to sell the franchise to the buyer. So it’s quite important to understand the financial ability that the buyer has when purchasing a franchise.

Joanna Oakey [00:03:20]:
That really is such an important thing, isn’t it? And often we talk about this with dealing with a landlord as well, and just a normal business. The thing is, you’re not just as a buyer, you’re not just thinking about, is this a business, the right business for me? But then you also have to think about, if you do determine it to be the right business, are you going to be the right buyer for approval by the franchisor or in other businesses, also the landlord. And of course, when buyers realize this, they then realize actually they have to prepare a bit of a marketing document about themselves in terms of their financial ability to run the business, that sort of thing. Maybe talk to us a little bit about that, Alan. How do they put, how do buyers put themselves in the best position to negotiate with or to have this discussion with a franchisor to ensure that the franchisor thinks that they’re a good person to take over the business?

Alan Prasad [00:04:17]:
So that’s a really good question there, Jo, because some of the franchisors would actually require the buyer to submit to them a business plan that would have, that would not just be about the business, because the franchisor understands the business, but more about their ability to operate the franchise. So things like do they have any experience in it? What sort of financial capacity do they have? What liabilities do they have? What is their financial status in being able to pay for the costs, the initial costs of franchises, when you’re buying a franchise, then the ongoing costs, so the initial costs can be quite substantial, particularly if the franchise always is a major franchise. So you’d be paying probably a fee where the buyer, where the franchisor, it’s a franchisor fee for them to then vet you, a training fee, an admin fee, and then obviously your legals and your accountants fees and so forth. So there are the added layers of expenses or costs that a buyer needs to understand and be able to accommodate in their financial planning when they’re purchasing a franchise. Then the buyer needs to understand what are the ongoing costs? Is there a marketing cost? Is there a royalty fee? Or is the franchisor going to be charging a percentage of the revenue or turnover of the franchise? And are there any marketing training and so forth fees? So the best place for a buyer to look at, what is the cost? What are the requirements of the franchisor is to look at the franchise disclosure document. This is a document that a seller of a franchise should be providing to the buyer, including with the franchise agreement, because under the franchise code of conduct, the seller is required to provide these documents to the buyer. In addition, they need to provide a copy of the franchise code of conduct as well to the buyer. The disclosure document will have very relevant information for the buyer to consider, such as the history of the franchise, the market it is operating in, whether it is a good idea for the franchise, the buyer to buy this franchise.

Joanna Oakey [00:06:41]:
Why should they buy this franchise? Who are the other franchises in the territory? Because franchises are bought around a geographical territory that the buyer will operate and market the business. They can’t go outside of that territory because they don’t want to have competition amongst other franchise owners within a certain territory. So this disclosure document is very critical for the buyer to understand as part of their due diligence process.

Joanna Oakey [00:07:16]:
And I mean, there’s so many things to consider here, aren’t they, when you’re buying franchise, and we’re certainly not trying to scare anyone off from buying franchise. Absolutely. There’s a lot of benefits of when you’re buying a business, having a business that, you know, has the systems and support and marketing behind it that franchises can offer when you’re choosing the right franchise to purchase or purchase, buy into. But one of the things that I see, Alan, and I think we both see quite a lot in this market as a whole of business sale and acquisitions. People who are buying a business have this thought in their mind that every commercial lawyer must understand the area of business sales. Every commercial lawyer must understand the area of franchises, right? So therefore, when I’m looking for a lawyer, I can just go to any joke blogs down the road that has a commercial legal practice, and I’ll be fine. Like, what are some of the mistakes that you think they can make, buyers can make if they’re dealing with a lawyer, or some of the risks if they’re dealing with a lawyer who doesn’t deal with franchises and franchise sales day in, day out?

Alan Prasad [00:08:29]:
That’s a very good question, Jo, because every time and again we do come across parties going to a general commercial law firm to try to purchase a franchise business. The number one is to understand the franchise agreement. The agreement is dictated by the law, by law, and one of the laws that the agreement needs to comply with is the franchising code of conduct, which is a regulation under the federal legislation. So it’s really important for lawyers to understand exactly what is in the franchise agreement that they need to advise the buyer on, number one. Number two is to look at the disclosure document and find what would be the risks that appear. So, for example, one of the risks that I always look at when I look at a disclosure document is the number of stores in that one particular territory or around it, like how much competition is going to be there and what is the population size that you are to market your store in. So these are some of the just really specific areas that lawyers need to be astute about when they’re advising on buyers or franchise. I’ve seen many a times where lawyers have been in fact sued by buyers after the transaction because after six months the buyer is looking at exiting the franchise because it wasn’t the right franchise that they were buying.

Alan Prasad [00:09:58]:
But not just that the advice that had been provided to them was either incorrect or insufficient.

Joanna Oakey [00:10:07]:
No one wants that right. We all want good deals to go ahead. And I think that’s the importance of buyers not just getting the right advice, but also having the confidence that they’re getting all of the information that they need, that they’re getting full advice. So when they get into the business, they starting with this confidence that at least they understand the legalities that sit behind it and the opportunities and liabilities and exposure as a whole. And there’s no business ever that ever existed that had no risks in it. But it’s just about making sure you’re properly across and understanding what those are and how to manage those risks. I guess for you as a business.

Alan Prasad [00:10:50]:
Owner, look, I mean, as a buyer, it’s an exciting journey to buy a franchise. I mean, you’ve mentioned on the advantages of that, having process procedure systems in place and importantly, having an exit plan. So a franchise agreement will obviously have that. I mean, having a business that is not a franchise, usually what I have seen, depending on the size of the business, is that the buyer continues to be in the business until probably retirement because they don’t know how to exit the business. Whereas in a franchise, one of the great aspects about purchasing a franchise business is that there will be very clear provisions in the franchise agreement of how to exit the business. So, for example, things like, if I want to be exiting the business, the first right of offer to sell the business would probably be to the franchisor, to the master franchisor. And then once the master franchisors have considered it, and if they don’t want to purchase it, then it can be sold to a third party. But selling a franchise business, in my experience, has been easier than selling a non franchise business because the buyers have the confidence of there being systems in place.

Joanna Oakey [00:12:06]:
Yeah. Isn’t that fascinating? It really is fascinating. Great opportunity for buyers and actually we’ve worked with a number of buyers over time who have bought a franchise, suddenly realize how good it is and then been multiple acquirers, often within the same franchise itself. Maybe talk a bit about that, Alan, what’s that opportunity? Once business owners come in, gotten into a franchise, a particular franchise, and realized that they can make a bit of a go of multiple where? What’s that benefit in multiple, multiple sites, multiple businesses within the franchise.

Alan Prasad [00:12:44]:
I’ve seen in success of multiple franchise owners. And the best part about it is that when you get into a franchise and demonstrate to their master franchisor that you have the ability to manage and operate one franchise business, guess what? The first right of offer will be to the best existing franchise to purchase any other franchises that are for sale. So I vectored for a group that had bought just one pizza hut and extended it to 27 all around New South Wales in just over 18 months. And that was incredible because what had happened is that they then were invited to be part of. Back then the Pizza Hut and others were owned by the Yum group company. And these franchisees were invited on the board to sit on the board of the master franchise and then to train the, the new french buyers of the franchise. The opportunities are huge financially and even non financially, because you have now built a reputation in a franchise to be really good at operating, managing it as well. That’s the whole idea, right? When you purchase a franchise, not many buyers just stop at the one franchise.

Alan Prasad [00:14:06]:
They usually continue to buy several others. And getting your step in first needs to be really important to be able to have the proper advisors by your side that understands what franchise purchasing a franchise means and continuing with those advisors through the journey of multiple purchases of franchise. That’s quite exciting.

Joanna Oakey [00:14:28]:
It’s so exciting, isn’t it, Alan? I just love, I love. That’s why we’re in this industry, right? It certainly is the industry for lawyers who like to focus on the positive and the opportunities in law. But I think the thing that makes me so excited is seeing these business owners who come in and quite green sometimes to begin with and get started and then suddenly work out the beauty of business. Now, business is hard, let’s be honest, but it is, it can just be such a beauty as well. And then seeing them really crack a system and then grow through acquisitions and as you say, so many opportunities in being a franchisee and then expanding your reach within that particular franchise, being able to make the most out of shared marketing teams and shared admin teams and all of those sorts of things and all of those other reasons for growth through acquisition. But I think it’s just, it is one of those things that just makes it a joy to be in this industry of business acquisition and sale. And as you say, the most important thing, though, is you just understand what you’re getting into and you get the right advice along the way.

Alan Prasad [00:15:45]:
Yeah, look, absolutely, there are certain legal requirements that are very specific to franchises when it comes to liabilities, when it comes to. So it’s really important for the lawyer to be able to assist the buyers in advising them initially, because when the buyers get the proper advice, when they purchase their first franchise, they become a lot more confident in going ahead and purchasing others. So it’s an education process. That’s how I look at it. The franchise lawyer. We educate our clients to understand what are the legalities around that. So, for example, under the franchise code of conduct and whether the franchisor will require certain liabilities of the franchise. So, for example, whether there’d be a personal liability that might be provided by the franchisor, by the buyer, but it could be liabilities under what are the assets of the business and so forth.

Alan Prasad [00:16:41]:
So the way that I would, the way that we to assist our client is to hold their hands through the whole process and make it an educational journey rather than just leave them at the end and then continue with them for the rest of the acquisitions that they have.

Joanna Oakey [00:16:59]:
Love it. Look, thank you so much, Alan, for coming onto the show again and talking all about acquiring a franchise. And is there anything else like any parting words you want to leave our listeners with? Alan?

Alan Prasad [00:17:12]:
Oh, look, Jo, I suppose just to qualify that this is quite a franchising from a bias perspective, one on one, very basic information that I’ve covered at the moment, there’s a lot more to be covered, which we have a lot of information and material in Aspect Legal that we can share with buyers. And if anyone wants to come along the journey to know a lot more, then they can certainly contact us and we’ve got a plethora of ideas and information.

Joanna Oakey [00:17:43]:
Love it. Love it. Alan, look, thank you so much for coming onto the show. I really enjoyed talking about this area, as I always do. So exciting talking about buying businesses and selling businesses, isn’t it? And such a fascinating area, this franchising, because of course, Australia has such a large component of franchises. It makes sense that if you’re looking at buying a business, a franchise would be one of those sorts of businesses that you’d be considering. Alan, huge thank you for coming onto the show. And we will have a link in the show notes to ways you can book in a call with Alan or any of our other franchising team if you’d like to talk about buying or indeed selling a franchise.

Joanna Oakey [00:18:26]:
Alan, thank you so much for coming onto the show.

Alan Prasad [00:18:29]:
It’s always a pleasure. Jo, lovely speaking to you. And yeah, thanks for having me.