Buying into a franchise system can be a promising path to business ownership, but should you start fresh or buy an existing location? If you’re considering purchasing a running franchise, it’s essential to weigh the pros and cons before making a decision. So, what are the pros and cons of buying an existing franchise in Australia?

While an existing franchise offers immediate income and brand recognition, it may also come with hidden liabilities or operational issues. In this guide, we break down the advantages and disadvantages, key factors to consider, and explain why seeking professional legal advice is crucial before signing any contracts.

A Quick Overview: Pros and Cons of Buying an Existing Franchise

Buying an existing franchise has both financial and operational advantages, but it may involve risks if not thoroughly assessed. Key takeaways include:

Pros:

  • Immediate cash flow
  • Established customer base
  • Proven business model
  • Trained staff and existing processes
  • Brand recognition
  • Easier financing

Cons:

  • Higher upfront costs
  • Potential liabilities
  • Limited flexibility in contracts
  • Resistance to operational changes
  • Franchisor approval needed

Benefits of Buying an Existing Franchise

There are several compelling reasons why entrepreneurs choose to buy an existing franchise instead of starting from scratch. Let’s explore the most important advantages.

1. Immediate Cash Flow and Existing Customer Base

Unlike a new business that takes time to build traction, an existing franchise usually has ongoing revenue and a steady customer base. This means:

  • Faster return on investment (ROI)
  • Quicker break-even period
  • Reduced marketing and advertising efforts early on

2. Proven Business Model and Systems

You’re buying into a franchise that already follows a tested operational framework:

  • Streamlined procedures and processes
  • Consistent supply chains
  • Set standards for quality and service

This lowers the risk compared to launching an independent or brand-new business.

3. Easier Financing

Banks and financial institutions may be more willing to fund your purchase if the franchise has a good track record:

  • Predictable income makes repayment easier.
  • This means lower risk perceived by lenders.

4. Trained Staff and Established Operations

An existing franchise often includes a team of trained employees and functioning operational systems:

  • It saves time on hiring and onboarding.
  • It allows for a smoother transition and continuity.

5. Brand Recognition and Corporate Support

Franchise brands usually offer national marketing campaigns and widespread brand awareness:

  • You benefit from their existing reputation.
  • Centralised marketing support can reduce your advertising burden.

Risks and Challenges to Consider

Despite the advantages, buying an existing franchise also carries certain risks. These downsides can affect your profitability, operational freedom and legal obligations.

1. Higher Upfront Costs

You’re not just buying equipment and assets; you’re also paying for goodwill and an established customer base:

  • Purchase prices may include intangible value.
  • Upgrades or renovations may still be needed.

2. Hidden Liabilities and Reputation Issues

Previous mismanagement could leave behind problems that aren’t visible at first glance:

  • Unpaid debts
  • Poor staff culture
  • Negative public perception

Always conduct financial and legal due diligence to uncover such issues.

3. Limited Negotiation Power

You may have to accept existing contracts and terms:

  • Fixed supplier agreements
  • Locked-in lease arrangements
  • Existing franchise terms that may not favour you

4. Resistance to Change

Implementing operational improvements or cultural changes may be met with:

  • Staff resistance
  • Customer pushback
  • Friction with existing suppliers

5. Franchisor Approval Required

You can’t simply take over a franchise without approval. The franchisor must vet and approve new owners:

  • This can delay the purchase
  • You may need to meet specific qualifications

6. Potentially Outdated Equipment or Location Issues

You may inherit older equipment or a premises needing upgrades:

  • Budget for renovations
  • Consider relocation or refurbishing if needed

Key Legal Considerations Before Buying

Before proceeding, it’s critical to understand the legal aspects and secure the right protections. Here are the top areas where legal guidance is essential.

Review of the Franchise Agreement

The franchise agreement outlines your rights, obligations and restrictions:

  • Ensure terms are fair and not overly restrictive
  • Review obligations for renewal, exit and ongoing fees

Examination of the Disclosure Document

Under the Franchising Code of Conduct, the seller must provide a disclosure document:

  • Includes financial history and legal disputes
  • Must be reviewed at least 14 days before signing

Lease and Asset Agreements

Check if the business location lease is transferable or renegotiable:

  • Confirm no hidden fees or obligations
  • Ensure you’re not liable for previous breaches

Compliance with the Franchising Code of Conduct

The transaction must follow the Code regulated by the ACCC:

  • Right to a cooling-off period
  • Dispute resolution mechanisms
  • Obligations on both seller and franchisor

Due Diligence Checklist

To make an informed decision, review the following before buying:

  • Financials: Profit and loss statements, tax returns, cash flow
  • Franchise Agreement: Terms, fees, obligations, renewals
  • Staff: Employment contracts, training levels, team morale
  • Supplier Contracts: Pricing, duration and exclusivity
  • Lease: Rent terms, maintenance responsibilities, tenure
  • Franchisor Relationship: Support levels, compliance history
  • Customer Base: Retention rates, reviews and reputation

Final Thoughts

Buying an existing franchise offers a quicker route to business ownership with many potential benefits, including cash flow and brand support. However, risks such as high costs, legacy issues and restrictive terms must be carefully evaluated.

Due diligence, financial review and legal analysis are vital to making a confident decision. With the right preparation and professional advice, purchasing an existing franchise can be a strategic and profitable investment.

Need Legal Advice Before Buying a Franchise?

At Rotstein Commercial Lawyers, we provide expert legal guidance on franchise purchases, contract reviews and due diligence. Whether you’re considering buying an existing franchise or negotiating terms with a franchisor, our team can help you navigate the legal landscape and protect your investment.

Partner with Rotstein Commercial Lawyers to ensure your franchise journey starts with clarity and confidence. Call us on +61 3 9604 7888 or visit our Contact Us page to schedule a consultation.