Due diligence critical to franchise acquisition

Published in the NBR 6 February

Thorough due diligence is critical to ensure prospective franchisees choose the right business, says franchise lawyer Chris Bradley.

The investigation, he said, would evaluate strengths and weaknesses, identify potential risks and unknown areas of activity and minimise post-settlement surprises.

“And due diligence can highlight areas in the business where improvement is required,” Mr Bradley said. “This allows the buyer to make changes quickly and hit the ground running.

“The scope and depth of the review will depend on factors such as the time frame for the sale, the size of the business to be acquired, its activities and how easy it is to investigate.

“Due diligence will usually include at least financial and legal aspects but separate specialist attention might be required in areas including tax and legislative compliance.

“Factors such as environmental and resource management issues, premises, employees, intellectual property, funding, liabilities and claims against the business should also be examined.

“And a critical area is to ensure that key contractual relationships are not severed by the sale process itself.”

Mr Bradley, a franchise lawyer with law firm Duncan Cotterill for 15 years, said assessing the strength and health of the franchise system to be purchased was vital while another important element was a strong franchisee-franchisor relationship.

“Evaluation of a potential purchase can only begin in earnest once all information is gathered,” he said, “and should include whether any issues raised can be resolved – and if so, at what cost.

“Any contract to buy a business should be made conditional on the purchaser completing a satisfactory due diligence investigation.

“And only after reviewing the findings will a buyer truly be in a position to confirm a commitment to the proposed acquisition.”

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