There are many aspects to consider when buying into a franchise. What business structure is most suitable for your business? What are the tax consequences when you commence, run or terminate a franchise? When and where to get legal advice?
When you buy a franchise you are known as the ‘franchisee/’ The ‘franchisor’ is the entity who provides the franchise.
The franchise agreement is the most important document that stipulates your rights and obligations when operating franchising. It is a legally binding contract that contains various clauses in relation to legal, practical and operational issues. Consequently, you should have it reviewed by a legal practitioner prior to signing it.
There are many advantages as well as disadvantages of franchising. Some benefits are:
• Allows you to start a new business relatively quick;
• Often you have access to comprehensive training on how to run your business;
• You are able to use recognise trademarks and patents.
The drawbacks of franchising include:
• The franchisor retains ultimate control over the business;
• High initial costs
• Possible dispute between a franchisor and franchisee.
Generally, a company or a trust would be an appropriate business structure to operate a franchise. The initial franchise fee you pay to the franchisor forms part of the cost base for your franchise business as your capital asset. As these fees are invested in your business, you do not deduct them as business expenses from your annual income tax. Ongoing payments of royalties, interest payments or levies to the franchisor are tax deductible as considered to be a continuing expense in carrying on your business. Additionally, you need to consider both capital gains tax (CGT) and GST consequences when you either transfer a franchise to another party or terminate a franchise.
In summary, when you consider buying into a franchise you should analyse financial information that is provided to you by a franchisor; have a drafted franchising agreement reviewed by a legal practitioner and consider structuring and taxation issues as well as succession planning.
Quinn Lawyers can review franchise agreements and inform you of the terms and conditions associated with the franchise. Contact us today on 02 9223 9166 or visit our dedicated website All Franchising Solutions for more information.
