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If you are a business owner who wants to expand your business, you should think about franchising. Franchising allows you to grow your business without having to use your resources. It essentially allows another party to use your business plan and replicate your business in another location. In return, you get royalties for allowing the business to use your model. However, any business decision comes with its pitfalls. The business that is being franchised becomes the ‘franchisor’, and the party who uses your business plan becomes the ‘franchisee’. This article will outline what the most common franchising mistakes are and how to avoid them.

Your Business Is Not Ready to Franchise

One of the most common mistakes that franchisors make is franchising their business too early. Many business owners see the growth stage as the most optimal time to franchise because the business has got a steady flow of cash flow and revenue. However, you should not franchise a business in its growth stage. This is because the growth stage is the time to see: 

  • what systems work best for your business; and 
  • how to make the business as profitable as it can be. 

Franchising at this point could compromise the model of the franchise because the business is not at its most efficient stage.

To avoid making mistakes like this, you should ensure a business in its maturity stage when franchising. This is the stage in the life cycle of a business where its revenue and growth starts to plateau. At this point, the business has figured out what systems are best for it, and it may have tapped out the revenue potential in its area. Franchising a business in this stage allows the business to start growing again without undermining the original business model. An excellent way to decide if your business is in the maturity stage is to look at your revenue and figure out if it has started to plateau. If it has, then franchising may be an excellent way to spur growth again. 

Your Model is Unfranchisable

It may be the reality that your business is just not suited to franchising. It may not be the news that business owners want to hear, but not all business models are franchisable. There can be many reasons for this.

Firstly, the business may not be workable in another location. It needs to be replicated in another area of New Zealand for the franchise to work. For example, your business may sell a particular product that is only useful in a specific part of the country. This will mean that your product will not sell if offered in another location. Another reason is that there may be no supplier of your product in another location. For example, a particular input good may not be sourced in a different part of the country. However, you may be able to get this input transported to the prospective franchisees’ location if it is financially feasible.

Secondly, your business may also rely on careful brand management for it to be successful. If you were to franchise your business, you might lose control over how the brand is managed. Even though your franchise agreement will outline how your franchisee can use your brand, you will not be able to monitor every aspect of your franchisee’s dealings as you would with your own business. Your business could suffer if your franchisee is using your brand in a way that is not beneficial for you. A way around this is to insert a termination clause in your franchise agreement. This will allow you to cancel the franchise agreement if a franchisee breaks a provision of that agreement. This provision could be using your brand in a way that is not specified in the agreement.

Bringing on the Wrong Franchisees

If you feel like your business is ready to franchise, then getting the right franchisees to buy into your business is crucial. All too often, franchisors are willing to sell their franchise to whoever is willing to pay the most in fees or royalties. However, this strategy can backfire. A franchisee needs to be able to have a good relationship with their franchisor. This is because whatever happens to one franchise can affect all the others as they are all trading under the same brand. Having a franchisor that follows your agreement and takes your advice will allow you to let that franchise run independently. The last thing you want to do is be in dispute with your franchisee or have to activate the termination clause in your agreement.

Key Takeaways 

Franchising your business is a popular way to grow your business in New Zealand. Many businesses franchise to expand their business to other parts of the country without raising any debt or equity. You must be aware of the mistakes that franchisors make when franchising their business. These are:

  • franchising too early;
  • having a model that is not franchisable; and
  • bringing on the wrong franchisees.

If you need any legal assistance with franchising, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Can I change my model to make it franchisable?

You may be able to change your model so that it becomes easier to franchise. However, if your fundamental business plan does not make franchising easy, then it may not be possible.

What is the best way to find out if I am bringing on the right franchisees?

Do your research on who they are and what previous business dealings they have been involved with. Check up on their references to make sure that they would make sound business partners.

Can I terminate the franchise agreement at any time?

If your franchisee has broken your franchise agreement, then you will be able to activate the termination clause and cancel the agreement at any time.

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