A recent report published by the Franchise Council of Australia highlights how buying a franchise can be a very good business decision and can outperform the wider SME sector.
As a franchisee, you’ll benefit from ongoing support, training and employee assistance from the franchisor. Buying an existing franchise reduces the need for start up costs and already has an established customer base. You’ll buy into the business knowing the financial track record and history, which is a huge advantage.
But becoming a franchisee isn’t necessarily going to be all smooth sailing.
Employment traps in franchises
Buying into an existing franchise involves a lot of new responsibilities. For example, as a business owner, you will have to be aware of all your responsibilities to your employees as their employer. While the franchisor will ideally assist you in this initially, they will also generally be wary of taking on responsibility for managing your employees by giving you ongoing advice – that is why they are selling you the franchise, to make you responsible for managing that aspect of the business.
So it is definitely worth doing your own homework on what your responsibilities are to your employees.
If you overlook your responsibilities, it could come back to bite you in the form of an expensive unfair dismissal or backpay claim (ER Strategies has lots of direct experience of helping franchisees out where this has occurred).
Here we outline a few potential employment traps when you buy an existing franchise:
1. Length of employment of existing employees
You have a choice when negotiating the sale of the franchise to recognise length of employment with the prior franchise, or not. This determines who is financially responsible for accrued employee entitlements such as sick leave and annual leave. However, keep in mind that long service leave in most jurisdictions automatically transmits to you as the new employer.
In addition, you can make clear in writing before employees commence employment with you as the new franchisee that prior engagement will not be recognised for the purpose of serving a new probationary period with your business.
2. Discipline issues
To prevent discipline issues arising, make sure you have fair procedures, clear expectations and honest communication with your new employees.
Here’s an example of how issues can escalate quickly out of control when those elements are missing.
The adult children of a previous franchisee were involved in running the business for a few months with the new franchisee. When the new franchisee and his own adult children were ready to run it by themselves and therefore had no need for the former franchisee’s children’s services, they both lodged unfair dismissal claims. It cost the new franchisee a lot of money to fight the claims as the former franchisee fancied himself as a courtroom advocate and ran the arbitration case himself.
This could have been prevented by having a properly worded employment contract between the new franchisee and the former franchisee’s children when they were engaged, which outlined the expected time limit for their role with the new franchisee.
3. Award rates
Make sure you know which award your business will be under, for example the Fast Food Award or Restaurant Industry Award. Different award rates affect how much you pay your employees and it isn’t always clear which is the correct award.
If you can’t afford to pay the appropriate rates, you probably don’t want to buy the business to begin with!
4. Check the contract
Before signing on the dotted line, engage a lawyer who specialises in the purchase of businesses to look over the sale of business contract.