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It can be tricky getting into business if you do not have the time to create your own business model. That is why franchising is one of the most popular business models in New Zealand. Franchising is a business structure in which one party (‘the franchisor’) authorises somebody else (‘the franchisee’) to use their business model in exchange for periodic franchise fees. It is popular because it allows the franchisor to grow their business without using their own labour and capital while the franchisee can implement a proven business model. However, if you are looking at buying into a franchise, there are a few questions you should ask yourself.

Can I Afford My Franchise?

There is an upfront cost to buying a franchise, and for some people, it can be the biggest purchase they ever make. That is why it is important how you decide to facilitate it. Most people will use cash and debt to finance their franchise. You must not burden yourself with too much debt when buying a franchise, as interest costs can mount up in the early stages of your business. It is preferable to use as much cash as you can when buying a franchise. Use a bank if you are borrowing money as they are likely to have favourable interest rates and are more likely to let you borrow if you are buying a franchise rather than a business. This is because a franchise has a proven track record. 

Have I Done My Research?

Doing your research is vital to any business decision, but especially franchising. This is because you cannot change the business model if the business is not doing as well as you hoped. Your potential franchisor will provide you with a franchise disclosure document. This document will include the financial health of the franchise and will contain other detailed reports. However, it is also essential that you do your own independent research. This is because when you are buying a franchise, you are replicating it in a different location. Therefore, you must do market research for your particular area.

A business doing well in one area does not necessarily mean it will do well in another. You should also find out if there are any issues with your supply or distribution chain in your area and if you can use the same providers as your franchisor. 

Is There an Exit Plan?

Most potential business owners will not think about their exit strategy, as they see it as something too far in the future. However, you should always have an exit plan when buying a franchise. This is because you do not want to be stuck in a franchise that you do not want to own. It is also important to think about an exit plan in case there is a process by which you have to sell the franchise. This is because most franchise agreements will have a specific process you must follow when selling your franchise. Usually, the franchisor must authorise the purchaser of your franchise. Having an exit plan might also be required for your bank’s borrowing requirements. The franchisor usually sets the exit plan. 

The exit plan may also contain a first right of refusal, which means that your franchisor has the first right to buy the franchise at any price you may set with a prospective buyer.  

Key Takeaways

Buying a franchise is not an easy decision. You should put a lot of thought into it before you decide to buy. Most importantly, you must consider whether you are in a safe enough financial position to buy a franchise. Even if a bank is willing to lend you the amount needed to buy the franchise, it is important to find out whether you can afford to service your debt. This means forecasting how much interest you will need to pay every month. 

Is it also essential that you do your market research into both the industry and the location. The business may be doing well, but it could be in a dying industry. If this is the case, the franchise may not be successful for as long as you hope. Doing research for your specific location is an important task, as not all franchises will do well in every location. 

Finally, you should always think about your exit plan, even if you are just starting. It is unlikely that you will own the business forever. Therefore, it is crucial that you know how you will sell the business when the time comes. If you need any legal assistance with buying a franchise, contact LegalVision’s experienced franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Am I better off getting a bank or a finance company to loan me money?

A bank is much safer as it will charge lower interest rates. However, it can be harder to convince a bank to let you borrow money.

How should I conduct my research?

Talk to people in the industry and to people in the local area. Decide if the area is growing and whether it is suitable for your franchise.

Who sets the exit plan?

Usually, the franchisee and franchisor negotiate this. However, the franchisor will know the process in which they want to sell their franchise.

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