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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 please 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?