Thinking of Buying a Franchise

John was sick of answering to someone else and wanted to be his own boss.  He was excited by a franchise opportunity that would make use of his home-handyman skills, and made enquiries to the franchisor owner (the Franchisor). 

He asked to see facts and figures but the Franchisor convinced him that information was “commercially sensitive” and therefore unavailable.  The Franchisor did however provide him with a lot of verbal information and John was impressed by what he was told.  He was particularly pleased with the promise of great returns and quick ones!  He was told that he would be given a client-list and that all he had to do was turn up, do the work and watch the money roll in.  It sounded fantastic and being a good Kiwi, trusting and idealistic, John signed on the dotted line.   

Alarm bells should have rung for him when the Franchisor attempted to restrict the information he would provide prior to sale.  In restricting the information, the Franchisor was also restricting his responsibility for the information that he did provide and on which John’s decision to buy was based.  When he later found the returns were less than a third of what was indicated over the first six months he felt ripped off and there was little he could do.

Information on Which to Base a Decision to Buy

An assertion by a Franchisor and/or a term in the Franchise agreement which allows a franchisor to restrict the information provided to you prior to the purchase of your franchise may allow him or her to present information, misleading or otherwise, without subsequent recourse for the franchise purchaser (or Franchisee).

Demand the Facts

Getting the full facts prior to buying is the only way to get a reliable indication of the soundness of a franchise system and commitment of the Franchisor.  Equally, full information-sharing is vital to the success of the future relationship as no-one reacts well to being duped. 

Interpreting the Facts

Having said this, even when you have the full facts you have to take other considerations into account, both legal and external. 

The following are what we consider to be the top five things to consider if you are thinking about buying a franchise:

1. How do you know you are going to make money?

There are many legal matters impacting on your ability to make money from your franchise. For instance, have your legal advisors check that the agreement clearly documents how you will get money out of your business and how often.  Importantly, consider whether the proposed method fits your purposes. Is the franchise brand reputable and well-known, and can the Franchisor “sell” it to you?  The Franchisor must own the Intellectual Property in the franchise to be able to license it to you. If they don’t an unrelated party could lawfully restrict its use and you could be left without your brand and business.  Check your “territorial rights” – that is, whether there could be a competing franchise close-by and, if there could be, consider whether this would put you out of business?

External market factors affecting your ability to make money include whether the franchise comes with a tried and tested franchise system in place.  For example, how many successful franchises are there locally and/or nationally? If you can, talk to existing and/or previous franchisees to find out more about the Franchisor and the success or otherwise of the systems they are using.  Check for individual, high-volume, clients and make sure they are supportive of your purchase.  If they are not and cease their custom, your figures are likely to slump immediately.

2. Do you know how much you have to pay the Franchisor out of the money you are going to make?

Have your legal advisor identify all the provisions in the agreement requiring up-front and on-going payments to the Franchisor. Do your sums.  Is the Franchisor expecting unrealistic returns for little to no input? If you are paying significant amounts ensure there are adequate mechanisms in place for you to measure the benefits you are receiving for those costs.

3. Do you understand when you might be breaching the franchise agreement?

The franchise agreement, good or bad, governs your relationship with the Franchisor.  If you fail to meet your obligations you will be in breach. Often, failing to meet certain revenue targets will constitute a breach so really do your research and make sure, as much as possible, that you can adhere to the agreement and make your business a success. Also, make sure you understand how you can take action against the Franchisor if they breach the agreement.

4. What are the consequences of any breach?

You can be forced out of your own business.  Refer back to point 3!

5. When you have grown the business and are ready to resell what are the restrictions?

When it is time to move on you do not want a third party Franchisor able to stifle your ability to do so. You may need to get out quickly due to a change in circumstances, health, financial or otherwise. Make sure you understand and are comfortable with the steps required for such an exit.  Also, make sure you understand and are you happy with the return the Franchisor is expecting on the sale. 


When you buy a franchise many of the risks associated with small business have been removed.  However, franchising has its failures too.  A franchise is only less risky if you choose wisely. 

Often, to get the right information and to interpret it correctly, you need to obtain legal, accounting and industry-specific advice.  This investment, up-front, can prevent considerable heart-ache down the track when it is too late to avoid the costs of a bad investment.