Buying a franchise can limit risk

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Inside Franchise Business: buying a franchise can limit riskBusiness format franchising is growing in New Zealand* and franchises can be an excellent entry point into owning businesses.  

However, with any business venture it is always best to thoroughly research it before entering into any agreement.

Look for a system that works

A successful franchise system is one which incorporates a documented business format.  Before signing any agreement you should speak with as many existing and former franchisees of the system as you can to find out how they like the system and what the franchisor’s support is like.

In a well-run franchise system there is a mutual interest between the franchisor and the franchisees because if the franchisees do well by increasing gross sales then the franchisor does well through increased royalties.

Be the right person for the business

Before signing any agreement you should meet the franchisor to satisfy yourself that you have the type of personality, skills and experience needed for the business.  You should always see if the franchise model is the right business model for you and that you will agree to follow the system and rules. A successful business person can still fail at running a franchise if they do not clearly understand their obligations.

Information provided by the franchisor

All franchisors who are members of the Franchise Association of New Zealand (FANZ) must provide a disclosure document that provides details on:

  • Identifying data of the franchisor and full details of the directors’ and key executives’ previous business experience and show a good record.

  • The franchisor company’s track record inter alia containing the rate at which franchises have been granted and performance results.

  • A full and understandable description of the franchise.

  • A clear indication of the total initial investment required including working capital.

  • A clear description of the money/payments that will become due and payable to the franchisor from time to time.

  • Up-to-date accounts of the franchisor for at least the past two years.

  • Such help that the franchisor may be able to give in introducing the franchisee to sources of finance and particularly institutions that have financed the purchase of other franchises in the system.

  • Details of the franchisor’s banker and other professional advisors.

  • The extent to which the franchisee will be restricted from carrying on any other business.

  • The extent to which the franchisee is obliged to be present and personally work the business.

  • The length of term of the Agreement together with rights of renewal if any (and if renewal will involve a payment of a renewal fee).

  • The franchisor’s right to select or oblige the franchisee to operate from sites approved by the franchisor.

  • The amount of training and back up and support that will be provided to the franchisee and whether payment for such training is included in the initial purchase price or in addition to it, and the extent of ongoing backup from the franchisor.

  • Number, name and contact details of franchisees within the franchise system and confirmation that it is permitted to discuss any aspect of the business with a view to obtaining an honest and thorough explanation from existing franchisees.

If the franchisor is not a member of FANZ and does not provide the above information you should nevertheless ask for it and the franchisor should be able to give the requested information.  

Bank barometer

Banks now recognise the growing popularity of franchising and have specialised franchising lending support teams. The confidence of a banker in a franchise system is shown by the extent (ratio of the loan to the price) to which it is prepared to lend at usual rates of interest on the purchase of an outlet and taking the assets of the business as security.

Always seek expert advice

It is very important if you are buying a franchised business to engage the services of an accountant and a lawyer who are experienced in franchising.  Any business decision must be considered carefully and as part of your due diligence you require accounting and legal advice in relation to the documentation.

* A 2017 survey of franchising in New Zealand revealed 631 business format franchise systems operating, up from 446 in 2012, with sales turnover for the entire franchising sector estimated at $46.1 billion. The survey was conducted by Massey University (Auckland) and Griffith University (Queensland, Australia)

Stewart Germann

Stewart is a commercial lawyer in Auckland, New Zealand with more than 35 years experi View More...
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