Considerations for the Prospective Franchisee

Considerations for the Prospective Franchisee

Franchising in New Zealand continues to grow strongly and there are many examples of successful franchised systems.  A Massey University Study in 2017 demonstrated the growing popularity of franchising in New Zealand:

  • the number of business format franchise systems operating in New Zealand increased from 446 in 2012 to 631 in 2017
  • there are estimated to be 37,000 business format franchises, employing more than 124,000 people
  • the annual sales turnover for the entire franchising sector was estimated at $46.1 billion

It is clear from the survey that business format franchising remains popular in New Zealand.  Whilst there may be many positive aspects of becoming a franchisee (such as brand awareness, sophisticated business systems and group buying power), entering into a franchise agreement is still a significant step as it often represents a long term commitment for the franchisee.  It is therefore very important that before you sign any franchise agreement you conduct your own due diligence and obtain independent legal advice.

Unlike Australia which is heavily regulated, New Zealand does not have any franchise specific legislation requiring franchisors to disclose any financial or historical information about the franchise to prospective franchisees.  However, some franchisors in New Zealand choose to become members of the Franchise Association of New Zealand (“FANZ”).  If the franchisor is a member of FANZ, the franchisor must comply with the FANZ Code or Practice and Code of Ethics.  The FANZ Code of Practice requires the franchisor to provide a disclosure document to prospective franchisees that provides details such as the financial standing of the franchise system, details of any disputes with franchisees and the expected payments from a franchisee. If the franchisor is not a part of FANZ, you should still request these basic details as part of your due diligence.

The best source of information on a franchise is the current franchisees and you should ask the franchisor for contact details of current franchisees. When you speak to the other franchisees you should ask about the earnings potential as advised by the franchisor and the robustness of the franchisor/franchisee relationship. 

The franchisor will usually provide a draft Franchise Agreement for you to review. You should review this agreement carefully with your legal adviser but in particular focus on the rights granted, your payment obligations, your rights to renew or sell the franchised business, and any restraint provisions.  Franchise Agreements are usually lengthy documents and so it is important that you engage a lawyer that specialises in this area. 

Of equal importance is to engage an accountant to review the financial information provided by the franchisor and indeed some franchisors may require that your accountant provides a certificate confirming you have been provided with independent financial advice.  Almost all Franchise Agreements will exclude reliance on any financial projections as the franchisee’s own efforts are a key part of the success of the franchise which is outside of the franchisor’s control.

The success of franchising in New Zealand continues to grow but prospective franchisees still need to carry out their own due diligence when choosing a franchise system to ensure they make the right decision. 

 

This resource was provided by:

Franchising Law

 

Is Your Business Ready to Franchise

Is Your Business Ready to Franchise

Often people with a successful business are considering a range of options for expanding their business. In evaluating the options, franchising is becoming an increasingly popular option for well-established businesses operating in a local market but wishing to expand regionally or nationally. 

What is franchising?

Put simply, the owner of a business (or franchisor) retains all of the intellectual property and know-how in their business system and authorises independent companies (known as franchisees) to operate the business system in a particular territory.  There are four basic features:

  • ownership by the franchisor of a name and distinctive business system;
  • the grant of a licence to franchisees permitting the use of such name and business system;
  • the inclusion in the licence (franchise) agreement of controls relating to the operation of the business and the manner in which the franchisee can use the intellectual property; and
  • payment by the franchisee of a fee or other consideration for the rights to operate the business.

Am I ready?

Franchising provides an opportunity for the owner of a business to:

  • expand the brand and customer base without having to provide all of the capital and personnel for that expansion; and
  • move away from the day to day operational running of the business and move more into a system development and mentoring role.

In deciding whether to franchise your business you need to consider the following:

  • is the business to be franchised well established, profitable and well capitalised? Franchisees will expect the business system to be robust and profitable and will ask questions of the prospective franchisor as to the financial strength of the business;
  • does the senior management of the franchisor have sufficient business experience and strengths? There is a significant difference between running a business and being a franchisor that runs a franchise system. You need to consider whether you have the necessary skills within your business to transition between the two roles;
  • does your business have a unique feature or way of operating that differentiates the business from the other competitors? Franchisees will be attracted to businesses that have a strong brand in the market and a good reputation for delivering results;
  • is your method of operating easily taught to others and able to be captured in a business manual? The power of franchising is the ability to replicate the same business system and provide the same service to customers. During the start-up phase for franchising, a lot of time will be spent documenting the system method and the way of doing business;
  • have you protected your brand and registered a trademark? This final point is critical for entering franchising as you will need to licence the use of the trademark to your prospective franchisees.

 

Next steps

If after answering the above questions you wish to proceed with franchising, then your next steps will be to decide upon:

  • documenting the business system into a manual that can be shared with franchisees as the rules for running the franchise business (usually with the help of a franchise consultant);
  • the proposed structure of your franchise (such as territories, fees, marketing and performance requirements); and
  • preparing the legal agreements between the franchisor and franchisees to govern the franchise relationship.

 

Franchising is a great option for those business owners wishing to expand their business and move away from the day to day operations to system control and mentoring.  There are some key areas that need to be considered before entering into franchising and it is important to establish the franchise system correctly from the start before engaging with prospective franchisees.   

This resource was provided by:

F