Buying an existing franchise can feel more reassuring than starting from scratch. There are customers, staff, fitted-out premises and actual sales figures to review. You can see the business operating.
That is a useful head start. But before signing the business sale agreement, you need to understand exactly what you are buying—and what it will cost to keep operating it.
A franchise agreement review should look beyond the franchise agreement itself. The sale contract, disclosure document and lease all form part of the deal. Here are the questions I would ask.
1 How much time are you actually buying
The seller can generally transfer only the balance of its existing franchise term. Buying the business does not automatically restart the clock.
Check what remains, whether there are renewal rights and what you must do to exercise them. Some franchisors elect to issue a new franchise agreement instead, potentially offering a fresh term with different fees and obligations.
Then check the lease. A seven-year franchise term is of limited comfort if you only have eighteen months of secure occupation remaining.
The purchase price needs to make sense against the period you can actually operate the business.
2 What fees will you pay the franchisor
The price paid to the seller may be only one part of your acquisition cost.
Will the franchisor charge another initial franchise fee? What are the documentation and training fees? Is there an assignment fee, and who pays it? Will any deposit already paid be credited?
Get a written breakdown showing the amounts, GST treatment and payment dates. Include these costs in your budget alongside stock, lease security, professional fees and working capital.
An attractive purchase price can look rather different once everything else is added.
3 What does the existing lease require
If you are taking an assignment of lease, you generally inherit its existing terms. You do not automatically receive a fresh lease or a chance to renegotiate.
Check the remaining term, options, rent increases, outgoings, permitted use, refurbishment and make-good obligations. What bank guarantee and personal guarantees will the landlord require?
Has the seller exercised an option? Is a deadline approaching? Does an existing lease incentive create any repayment obligation on assignment?
If occupation is through a franchisor’s sublease or occupation licence, understand how your right to use the premises depends on the franchise agreement and underlying lease.
4 Do the figures and the fitout stand up to scrutiny
Franchise due diligence should go beyond the seller’s profit and loss statements.
Ask your accountant to check sales against supporting records, including POS reports, bank receipts and BAS. Where appropriate and available, do those figures align with turnover reported to the franchisor or landlord? Material differences need an explanation.
Look at the physical business too. Is the branding current? Is the equipment in good condition? Could the franchisor require an expensive refurbishment shortly after you take over?
Request written details of known or intended upgrades, replacements and capital expenditure.
If employees will stay, check which entitlements and periods of service you must recognise, what the seller will pay out and what adjustments should be made at settlement. The sale agreement’s allocation of costs must account for the applicable employment laws.
A business can be trading well and still come with substantial expenses around the corner.
5 What is happening across the franchise network
One outlet’s trading history does not tell you everything about the franchise system.
Speak with existing and former franchisees where contact details are available. Are they happy, engaged and receiving useful support? What do they say about profitability, stock availability, unexpected costs and their relationship with head office?
Ask about the franchisor’s growth plan. More outlets may strengthen brand recognition, but nearby locations, delivery channels and competing concepts may affect your business.
Consider the local market as well. Is demand growing? What competition is emerging? Your assessment should include where the business is heading, as well as where it has been.
6 Do the legal documents work together
Buying a franchise business commonly involves three separate sets of documents:
- the franchise agreement and disclosure document;
- the business sale agreement; and
- the lease, assignment documents or occupation licence.
Each deals with a different part of the transaction. They need to align on consent, payment, completion, handover and commencement.
What happens if the franchise agreement is signed but the sale cannot complete? What if landlord consent is delayed? Can you take over the business before you are authorised to operate under the brand?
These are practical questions with contractual consequences. They should be resolved before signing, rather than left for everyone to sort out at settlement.
7 Will the training and operating requirements suit you
Franchisor training and seller handover serve different purposes.
The franchisor may teach its systems and standards. The seller can explain the particular business: staff, customers, ordering patterns, local relationships and daily routines.
Confirm who provides each, how long it lasts and whether assistance continues after settlement. “The seller will help out” is much less useful than a clear handover obligation.
Also check what the franchise agreement expects of you personally. Must you work in the business full-time? Can you appoint a manager? Must directors complete training?
If you intend to retain another job or operate through a manager, make sure the agreement accommodates that intention.
8 What does the Franchising Code require
Buying an existing franchise still attracts protections under the Franchising Code of Conduct. The rules differ depending on whether you enter into a new franchise agreement or take a transfer of the seller’s existing agreement.
Disclosure and consideration period: For a new agreement, section 23 requires the prescribed documents, including the disclosure document, Code and proposed agreement, and generally a 14-day consideration period before the franchisor executes it. Certain amendments or later earnings information can restart that period. For a transfer without a new agreement, section 24 requires disclosure and generally prevents the franchisor giving consent until the prescribed 14-day period expires.
Franchise cooling-off period: A new agreement generally carries a 14-day right to terminate after entry under section 50, with additional rights in certain franchisor-provided premises arrangements. For a transfer without a new agreement, section 52 sets a different deadline: the right ends at the earlier of the prescribed 14-day period and taking possession and control of the business. Limited exceptions and opt-out provisions apply.
Refunds: Sections 51 and 53 address repayments following cooling off. The franchise, sale and occupation documents must be coordinated; terminating a new franchise agreement does not automatically unwind the other contracts.
These references are to the Code in the Competition and Consumer (Industry Codes—Franchising) Regulations 2024.
Get advice on the whole transaction
An established franchise can be a good opportunity. The important question is whether the purchase price, remaining term, future expenditure and operating obligations work for you.
At Magnolia Legal, I review franchise purchases with those commercial questions in mind. That includes considering how the franchise agreement, business sale agreement and lease fit together, and identifying the points that need clarification or negotiation before you commit.
If you are buying an existing franchise in Australia, get in touch to discuss a review of your proposed transaction