Franchising can be a great way to own your own business. We have seen many very successful examples, but also some failures. Just as with any business, there are risks that must be understood and assessed as carefully as possible. However reputable franchise systems provide significant support, mentoring, guidance and other benefits that aren’t available if buying an existing non-franchised business or starting your own business.
Benefits
- Particularly if the franchise system is already established, you can use a recognised and proven brand. Brand development should also be taken care of for you. Some franchises also come with an established customer base – but be wary of income guarantees as these are often not as dependable as they might appear.
- In a good franchise system you will usually receive training and development opportunities, help with sourcing equipment, supplies and premises, marketing support and an established system that helps you run the business successfully and in a compliant manner. Some systems also take care of some of the ‘back end’ tasks for you, such as bookkeeping and contract management, so you can focus on serving your customers. You will also have access to the experience and knowledge of the franchisor and other franchisees in the network.
- Being part of a network, franchisees can often benefit from group purchasing power, as the franchisor uses the size of the network to negotiate stronger supply deals for franchisees. Some franchise systems also have established relationships with major banks, potentially allowing easier access to capital. And in other systems, the scale of the network allows access to corporate or Government customers that would otherwise be inaccessible.
What are you buying?
You should receive at least some of the above benefits, and others. You will sign a franchise agreement which sets out the obligations of the franchisee and franchisor and allows you to use the franchisor’s business system and branding to run your own business, for a period of time. Alongside the franchise agreement, there is usually an operating manual, or series of manuals, which are essentially instructions about how to operate various aspects of the business.
Risks
- Unfortunately not all franchisors are reputable and not all franchise systems are worth the fees they charge (although many are). Problems within a franchise system – or indeed any business – will usually be invisible to outsiders. It is therefore very important to ask the right questions of the right people, before you become contractually committed or emotionally invested in the franchise. We can help you do this.
- A franchise is nearly always time-limited. If your franchise terms ends without being renewed or extended, you won’t have any further right to operate the franchise and won’t be able to sell your business for full value. It’s important to remain aware of your franchise term and take appropriate action to avoid your franchise unexpectedly coming to an end.
- You will usually be restricted from operating a similar business for some time after you cease being a franchisee. This is part of protecting the franchisor’s goodwill and intellectual property – which you benefit from while you are a franchisee – but you need to be aware of the impact that may have on your ability to continue working in the industry after you leave the franchise system.
There are many other aspects to consider when looking at franchising – these are just a few things to think about. We recommend preferring franchises which are members of the Franchise Association of New Zealand, as this helps indicate a commitment by the franchisor to operate responsibly.
It is also important to engage the services of an accountant and a lawyer experienced in franchising. We have seen situations where franchisees did not do this, to their detriment. Gaze Burt has very substantial expertise in franchising – we’d be pleased to help.
