What is franchising and is it for me?

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There are lots of definitions of franchising, but its principles are very simple. franchising is an agreement that allows one party (the franchisee) to do business under a brand name and according to a given pattern of business that has been developed by another party (the franchisor).

Franchisors and franchisees
A franchisor develops a 'business format' – an operating system and a brand for selling a particular product or service. The business format is in essence a 'blueprint' for operating the business.

A franchisee is an individual who pays an initial fee and ongoing royalties to the franchisor, to use the business format to operate their own business.

Different types of franchise arrangement
The term franchising can be used to describe a range of business structures including dealerships, co-operatives and agencies. Most common however is the business format franchise in which an entire system for conducting business is replicated. Within the business format model, there are a number of variations that you should be aware of:

- Unit franchising: This is the most common type of franchising, under which a national franchisor grants a franchisee the right to operate one outlet or in one territory. Well-known examples of unit franchises include Muffin Break and McDonald's. A variation of unit franchising is multiple unit franchising, under which a franchisee may operate more than one outlet or operate in more than one territory.

- Combination franchising: This is essentially the marketing of several franchised products or services in the same location. Well-known examples of combination franchising include Subway stores within StarMart outlets and Lotto shops within PaperPlus stores.

- In-store franchising: This usually refers to the practice of a department store leasing space or granting a concession of space to a franchise system which will establish franchise outlets in that space. An example of in-store franchising is the BB's Espresso outlets within Freedom Furniture

- Conversion franchising: This is the practice of recruiting independent small business proprietors from within the same industry into a franchise system. Examples of conversion franchising include an independent hairdressing business joining Rodney Wayne.

- Master franchising: In master franchising, a national franchisor grants another person (the master franchisee) the right to sub-franchise the system to other franchisees, usually in a defined territory, region or country. This is a common system for developing franchise systems internationally and for franchises that have a large number of individual franchisees, such as Fastway Couriers and Green Acres.

- Turnkey franchising: Turnkey franchising is a form of business format franchising whereby the franchisor provides the franchisee with fully fitted-out, leased or sub-leased premises as part of the franchise package instead of simply providing specifications to the franchisee to fit out their own store. Most retail franchise businesses are developed this way.

Some issues to be aware of:
- When you buy into a franchise system, you are buying the right to use the business format for a specified period of time (the term of the Agreement). If everything is going well, the franchisor will usually extend the Agreement when that period expires, but that is not guaranteed.

- There may be limitations on what you can and cannot do in a franchise, ranging from advertising and pricing to whom you can sell your business to.

- Just as you can benefit from the strength of a good brand, you can also suffer if the brand loses its appeal to customers. This may come about from poor performance by the franchisor or by other franchisees in the system.

- You still face many of the risks of other small businesses – a competitor opening up next door, a debtor failing to pay you etc. Being part of a franchise can reduce some of your risks, but does not eliminate them.

Is franchising for you?
Unlike an independent business, a good franchise offers tried and tested methods and systems for operating and managing the business, ongoing support and training and a strong existing brand to leverage off.

Statistics show that franchises can and do work very well: according to the 2001 Survey of franchising in New Zealand, 94% of franchise units were still in operation after three years.

In some ways, a franchise is like a lease in that you buy the right to use the system for a set number of years. After that period your right to continue in the business ceases, unless there is a right of renewal.

Most reputable franchises operate under a set of very specific rules, which you must fully understand and be comfortable with before signing a Franchise Agreement. As will be made clear throughout this Guide, you need to approach the decision to enter a franchise carefully and ensure that you take expert advice.

Ultimately, only you can decide whether franchising is right for you and a lot will depend on the type of franchise business you decide to pursue. Here are some views on what it takes to be a successful franchisee...

What the franchisors say:
- "I have to be convinced that the people we take on as franchisees are passionate, hard-working and energetic – people who convey the values of the Burger Fuel brand. We're not interested in people who just want to buy themselves a job." Chris Mason, Franchisor, Burger Fuel

- "The strength of having an @Your Request franchise is the reputation we have developed and the systems we have built. The most successful franchisees are invariably those who work hard and follow those proven systems. Adrian Kenny, Franchisor, @Your Request

What the franchisees say:
- "I had come from a highly specialised corporate environment, so one of the biggest changes in taking on a Muffin Break franchise was having to become a jack of all trades. I'm now a barista, a baker, a book-keeper and a billion other things as well – but the challenge of working for myself has been worth every minute!" James Arbuckle, Franchisee, Muffin Break

- "This business is built on the strength of having good people. You've got to be able to get good staff and keep good staff. It sounds simple, but if you've never managed a team of people before, it takes a lot of getting used to." Rod Clarke, Franchisee, Hardy's Healthy Living

- "This is a seven-day-a-week operation and we stay open quite late at night. You can't do it all alone so you've got to have the support of your family to make a franchise work." Andrew Hares, Franchisee, Video Ezy

What the banks say:
- "We see hundreds of different franchises and there is no ideal in terms of structure or design. What most successful franchise systems do have in common, however, is a strong ongoing relationship between franchisee and franchisor. Co-operation, commitment and communication are the real building blocks of success in franchising. These largely come, not from legal agreements, but from ethical dealings, strong leadership and mutual respect of each party for the goals of the other." Mike Quigan, Franchise Development Manager, ANZ

The Franchise Association of New Zealand is an official regulatory board for franchises in New Zealand. They facilitate the process of learning and sharing information, and encourage high standards of conduct through the Association’s Code of Practice Ethics, by which all its members must abide.

6/06/2008

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