Looking to buy a franchise?
Buying into a building franchise can be a lucrative investment, but it also comes with a set of legal considerations that you need to be aware of before signing any contracts.
In this article, we’ll provide a general overview of the key legal issues you should consider when buying a building franchise, to help you identify potential pitfalls. However, it is important to remember that different franchise businesses may have different legal requirements and considerations.
Franchise Agreements and Documents
One of the most important legal documents you’ll need to review when buying a building franchise is the franchise agreement and disclosure document.
You must take the time to read everything carefully and ask questions if anything is unclear.
Some key questions to ask include:
- Is an exclusive territory being granted?
- Are there operation manuals, and can I read them before signing a contract?
- How long is the agreement for, and can it be extended?
- Who owns the intellectual property, and is there any restraint of trade during the contract or after it ends?
- Can the franchisor or franchisee terminate the contract, and in what circumstances?
Under the Franchising Code of Conduct, new franchisees are entitled to a seven-day “cooling off” period, during which the agreement can be terminated. However, conditions for termination are generally set out in the franchise agreement, so it’s essential to get familiar with it and know what you’re getting into.
Structure
Before you buy a building franchise, it’s essential to seek advice from a lawyer and accountant to determine the best way to structure the ownership of the business.
There are different ways to structure the ownership of a business, including forming a company, creating a trust structure for tax and risk minimisation purposes, or operating as a sole trader or partnership. Each structure has its advantages and disadvantages, so it’s crucial to investigate well before you buy.
Personal Guarantees
Most franchise agreements include guarantee provisions, which make the guarantor(s) personally liable for the franchisee’s obligations under the agreement.
Most franchisors won’t remove guarantee requirements, but some may agree to limit or cap liabilities. It’s worth discussing before you sign anything.
Existing Franchises
If you’re looking to purchase an existing franchise business, the consent of the franchisor must be obtained. A franchisor may not agree to the proposed sale, may have first rights of refusal, may impose conditions or may not approve the prospective franchisee.
So, remember not to sign a sale of the business agreement unless the franchisor has consented in writing. Also, investigate to ensure all the assets of the business are free from any existing debts or burdens.
Occupancy Rights
Make sure you understand whether the franchisor or you, as the franchisee, will hold the lease of any premises and who is accountable for the fit-out.
If you take the responsibility, you’ll need to organise the lease, and if the franchisor controls it, they’ll need to provide you with a license to occupy. A lease and a license to occupy have different legal rights and costs, so seek advice about the distinctions and associated risks.
Licenses
Some franchise agreements may require you or someone you nominate to obtain a special license, such as in building, real estate, or when a liquor license is essential. It’s crucial to find out what’s required and whether you’ll be able to secure the necessary licenses before signing any binding agreements.
Franchise Lawyer
While there’s a lot you can check yourself, remember that franchise law is a specialisation. When buying a franchise, you should engage an experienced lawyer to help you navigate the buying process, provide cost-effective advice, and identify any pitfalls.
There are two main types of franchises, according to the Franchising Code of Conduct. These are product distribution franchises and business format franchises. In product distribution franchises, the franchisor supplies the franchisee with products to sell or distribute. In business format franchises like Stroud Homes, the franchisor provides the franchisee with a complete business system, including marketing, branding, and operations manuals.
Looking to join Stroud Homes NZ?
Buying a franchise can be a great way to start or expand a business, but it’s important to understand the legal considerations involved.
Be sure to carefully read and understand all of the franchise documents, seek advice on the best ownership structure for your business, and consider the legal obligations that come with owning a franchise. You can check out our FAQs for more information.
To find out how to join the Stroud family of builders, call Mark Harris direct on 027 606 0063 or email: mark.harris@stroudhomes.co.nz.
We’ve got building businesses for sale in prime locations around New Zealand – Check out if there are areas near you available today!
