What is a franchise?
A franchise is a legal business relationship between the owner of a business system (which can involve trademarks, trade names, logos, etc) and a person or group that wishes to use the system or identification in a business.
It is a plan of distribution under which an individually owned business can be operated as though it were part of a larger chain, with the chain having certain products, systems or designs of benefit to the potential buyer of the franchise.
Franchising in New Zealand
Franchising arrived in New Zealand in the 1960’s. About that time a number of well-known franchises such as McDonald’s started to move into the country. Initially franchises were viewed with some suspicion because there were some spectacular early failures because the whole concept of franchising was poorly developed. Many franchises were set up and expanded before companies concerned were ready to operate under the franchise type method.
In fact, in those days, if the word franchise was used in advertisements for a business for sale many people became wary and would not proceed. People were suspicious of the whole franchise thing. Even if franchising had been running successfully overseas for many years it took some time for new Zealanders to adapt to the new method of doing business.
New Zealanders, in general, were keen on self-employment, but being independent people, many did not feel inclined to pay money to another organisation for running their type of business operation. Most were also very unhappy with the ongoing royalty payments that would be due based on the success of the business. By the mid 1990’s franchising had started to earn a reputation in N.Z as being a viable business proposition as more and more successful companies came from overseas.
Franchising is now firmly part of the New Zealand business scene.
What are the main elements of a franchise?
The typical franchise would contain the following elements:
- There is an agreement between the Franchisor (owner of the franchise) and Franchisee (buyer of the franchise).
- The Franchisee pays the Franchisor a fee for the rights and services that the Franchisee uses from the Franchisor.
- The name belongs to the Franchisor and is leased out for use by the Franchisee.
- The Franchisor grants a licence to the franchisee to carry on a business under the franchise system and mode of operation.
- The Franchisee has to operate his or her business strictly in accordance with the requirements of the franchisor and in line with the marketing plan and operational manuals that are supplied.
- The Franchisor maintains full control and the Franchisee is not able to make any chances to the business operations without consent from the Franchisor.
- The Franchisor requires the Franchisee to pay a royalty based on the turnover of the business.
The parties involved
The two groups involved in a franchise are
- The Franchisor (the person or company who owns the rights to the business name, systems and method of operation) and
- The Franchisee (the person who buys that franchise).
The franchisee and franchisor work together
A franchise basically controls how a business is to be contracted between the two parties involved. These two parties are the Franchisee (the person or group coming into the franchise) and the Franchisor (the person or group that owns the franchise).
Franchising is based on trust between the two parties.
Quite simply, the Franchisor provides the business expertise that would not normally be available to a Franchisee. This expertise can include marketing expertise and plans, management advice, financial help, premises, location and design, systems and training, etc.
What the Franchisee contributes to the operation is their entrepreneurial spirit and a desire to succeed, plus of course the capital injection by way of purchase of the franchise.
Why buy a franchise at all?
People are attracted to franchises mainly because of the track record of success many of them have achieved over many years. That is, a new business owner would be looking at the more secure guarantee of success by following the formula already proven by the owner of the franchise.
They would be attracted to the combination of benefits, which the franchise supplies in the way of a brand name, experience, proven systems, marketing expertise and economies of scales that are part and parcel of an established long trading franchisor.
It is a well-known fact that a good franchise generally has a much higher success rate than any other type of business. However, even though the success rate for franchise owned businesses is higher than independent operations, there is still never a guarantee of success for the new franchise owner.
Never make the mistake of rushing into a business franchise just because you know the franchise name and because it appears from the outside that they are successful. Every business has risk and just because the franchise is successful in other cities or locations, does not guarantee it will not fail in your area with you operating it.
A potential new owner must therefore carry out full research and examination of any franchise opportunity to ensure that its chance of success is high. Before all this, however, a new owner must determine whether they have the character and the desire to own and run a business, after taking into account their attributes and skills.
Franchising is lower risk
If you are someone worried about taking risk, then franchising may be the best option for you. This is because other people have already taken the risk by establishing their own franchise operation and they have brought it to its current stage successfully.
The fact is the proportion of new businesses that fail within the first years of operation is much higher than the proportions that succeed.
Be sure, therefore, that you have taken into account the risk of the business failing. Remember whatever business you choose (whether a franchise or a standard business), all would require hard work, dedication and sacrifice. They are all the essential ingredients for prospering in any business venture, including a franchise.
5 Reasons for buying a franchise
- You want to use your business skills and experience.
- You want to use your savings or money that you have received from redundancy.
- You want to have something that you can have full charge over.
- You are looking at having a change of career from working for a boss.
- You are looking ahead and want to build a retirement nest egg as well as provide for the future of your family
7 reasons for NOT buying a franchise
- Your age.
You may be getting on in years and feel that the heavy and strong requirements of the franchise could be too much for you.
- You want to retire.
After looking at the franchise, you may simply decide it is too much work and want to have a break.
- You do not want to have full control.
You are used to working for a boss and the responsibility of having full control of an operation does not interest you.
- You want to be independent
You may want to run your own show with full independence and find that under the franchise system this is not possible.
- You want to make a profit quickly.
It is possible that your franchise will take some time to develop and therefore unable to generate cash for you immediately. This may not be suitable to your circumstances.
- It costs too much.
You may find, at the end of the day, after weighing up what you are getting and the lack of independence as well as the heavy compliance requirements, the overall cost you have to pay is too much.
- Some franchises do not work.
You have heard stories of franchises which fail and find yourself in a situation of not being prepared to take that risk, especially if you are outlaying a lot of money to purchase the franchise business.
Take note of the “cooling off period”
One of the important features of a franchise if bought through a member of the Franchise Association of New Zealand (FANZ) is what is known as a cooling off period. The cooling off period should apply to all sale and purchases of franchise.
The “Cooling Off Period” is a period of 7 days (from the date of entering the agreement or paying over money under an agreement) that allows a franchisee to change his or her mind about the purchase.
It is very easy for franchisees to be carried away with enthusiasm and excitement at the early stages regarding the prospect of running their own franchise. Sometime later they may have second thoughts for all sorts of reasons. To protect franchisees from their own lack of judgment or from their failure to understand fully what is involved, there is a period of one week which allows a franchisee to pull out if they so choose.
Unfortunately many franchisees are bullied into completing the purchase by a franchisor and this cooling off period would protect people who are inexperienced or have not consulted with their advisers before signing the dotted line.
Besides the franchise agreement, there are other documents involved in a franchise.
- Disclosure documents. In New Zealand this is a requirement of the franchisor if the franchisor is a member of FANZ.
- Manuals. The franchisee should have developed operation and marketing manuals for the franchisees to follow.
- Lease documents. These would include lease of premises.
- Fit Out agreement. For the fit out of premises before the business opens.
- Confidentiality. Agreements would need to be in place which guarantees confidentiality of the franchise system. Papers are signed before the system is fully revealed otherwise people outside of the group would have this knowledge.
More tips when buying
When you are buying a franchise, here are a few tips that may help you to make a decision.
- Make sure you obtain the best legal advice that you can before signing any documents or before making any decisions that could tie you up legally.
- Make sure you see your accountant and ask him or her to go through all the financial aspects of the franchisors business as well as the financial projections for the outlet that you are looking to buy.
- Make sure you obtain every explanation for every question that you could possibly have. Do not be put off by brief answers. Ask for details as well as confirmations.
- If you are told anything at all by the franchisor that affects your thoughts about the franchise, make sure they are confirmed in writing to you. Do not rely on oral statements.
- Do some investigations. Investigate every area of the franchise as well as the franchise system and have independent credit checks performed and independent advice sought.
- See current Franchisees and obtain their opinions.
- Go with your gut feeling. If you do not feel right do not proceed.