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How can I protect my assets when I buy a franchise?

PUBLISHED ON 20TH OF OCTOBER 2017 ONLINE – FRANCHISING MAGAZINE ONLINE

When buying a franchised business franchisees should ensure that their personal wealth is protected.

Each franchisee’s personal circumstances need to be assessed on their merits and also based on which franchised business is being purchased.Asset protection is a difficult task in the franchise environment but the right set-up may provide some protection.

There are different legal structures that can be utilised in purchasing any business, regardless of whether it is a franchised business.  These include:

  • Sole trader;
  • Company;
  • Partnership of individuals or companies; or
  • Trust with a corporate or an individual trustee.

The most recommended structure for buying a business is either a company or a trust with a corporate trustee, as it alleviates most of personal liability of its directors and protects their assets.

The intricacies of which structure is best in the particular circumstances of the franchisee should be discussed with a lawyer (for asset protection) and an accountant (for most effective tax structure).

However, it should be remembered that most franchisors in Australia will request a personal guarantee from each director of the corporate franchisee (or corporate trustee), which, in turn, will expose all assets held in the names of such directors. The same will also apply to landlords, who will, in most cases, ask for personal guarantees from all directors of the tenant company.

In some instances, where the potential franchisee has a spouse, it may be prudent to set up a corporate franchisee entity with only one director, whille all the assets are transferred to either his or her spouse or another family member.

Obviously, the costs involved with transfers of assets need to be weighed up against the potential liability and whether it is worth doing in the first place.Consideration should also be given to whether the franchisor requires the spouse of the director to sign a guarantee as well, in which case transfer of assets into their name will prove to be fruitless.

One other avenue of protection when buying a franchised business, which should be utilised regardless of the legal structure, is purchasing and maintaining business insurance in relation to the operations of the franchised business.

Depending on the type of business, the industry, the size of the business and other factors, different insurance covers will be recommended.

As a minimum, business insurance should include:

  • public liability insurance (in case any person sustains injury at the business premises or as a result of dealing with the franchised business) with cover of $10 million to $20 million; and
  • workers’ compensation insurance, if there are employees in the business (for any employee having an accident whilst at work).

Franchisors will also stipulate in the franchise agreement all types of insurances required to be taken out by the franchisee as a prerequisite to running the franchised business.

Franchisees should consult with an insurance broker to obtain the appropriate cover for their franchised business, both to comply with the franchise agreement and for asset protection.

In any event, before buying a franchised business, proper advice should be obtained from a lawyer and an accountant of the most effective structure that will provide a balance of asset protection and tax effectiveness.

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