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Franchising is a great way to expand your current business. It allows you to grow without having to use your own labour or capital. Franchising is a business structure in which you (‘the franchisor’) authorise another party (‘the franchisee’) to use your business model in another location in exchange for periodic payments. It is a popular method in New Zealand as it allows business to expand quickly and efficiently. However, like with any business decision, you must ask yourself some critical questions before you decide to franchise your business. This article will outline what some of those questions may be.

Am I Ready to Franchise?

The most important question to ask yourself is if you are ready to franchise your business. There will never be a perfect time to franchise, but you should ask yourself if your business is at the right stage of development to start franchising. The optimum time to franchise your business is just after the growth stage. This is because it gives you enough time to exhaust the market around you and learn the ins and outs of your business. You should look to franchise when your sales start to plateau because it enables your business to expand off the back of another ‘growth stage’. 

However, it is essential to make sure that you do not franchise too early as you can risk losing control of your business. You must also convince franchisees that you have a proven track record so that they are comfortable buying into your business. 

Does My Franchise Document Have the Necessary Provisions?

If you want to franchise your business, making sure you have the correct documentation is crucial. This is because your documentation is your safeguard against any disputes you might have with your franchisee. The most important document is your franchise agreement. This is the document that will underpin the legal obligations and rights between a franchisor and a franchisee. Some of the main clauses that a franchise agreement should include are:



Termination Clause

This clause enables you to terminate the agreement with your franchisee if they break a provision of the agreement. This is an essential clause as it gives you a remedy if the franchisee is not upholding their obligations. 

Dispute Resolution

This clause requires any issues between the franchisor and franchisee to be resolved through a dispute resolution process. This means that both parties can save money on lengthy court proceedings. Dispute resolution also helps preserve relationships.

Exit Plan

This clause sets out the exit plan for the franchisee, so they can sell their business effectively. In addition, it may give the franchisor some control over who the franchisee can sell to.

Having a foolproof franchise agreement will make the franchising process much easier, and there is a higher likelihood of the franchising being positive for your business.

Do I Have Systems in Place to Keep Up With My Franchise System?

If you decide to franchise, you must have good systems in place as the number of franchisees you have will start to multiply. You should make sure to have a way of communicating effectively. Your franchisees need to know of any changes to the business model, and you should be able to alert your franchisees to anything you want them to do. For example, there may be a: 

  • need to alter your franchise agreement to include new intellectual property; or
  • new training program for staff. 

It is also essential to have a sound communication system to inform your franchisees of any law changes related to the business. Even though a franchisor will not be liable for any transgression committed by a franchisee, it is still in your interest to inform a franchisee of new changes. This is because an offence committed by a franchisee can ruin the franchise’s reputation as a whole.

Key Takeaways

Any big business decision should not be taken lightly, and this includes franchising. Franchising your business should be thought through carefully, as it is challenging to reverse a franchise structure once it has been enacted. The most crucial aspect of deciding whether to franchise your business is making sure that your business is in the proper business cycle. You should undertake a franchise after your business has passed its growth stage to allow your business to exhaust the sale opportunities in your area. Make sure to have sound communication systems in place and have a foolproof franchise agreement if a dispute arises with your franchisee. If you need any legal assistance with franchising your business, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Are there certain clauses that have to be included in the franchise agreement?

No, but most franchise agreements are similar and contain the clauses included above.

Am I liable for offences committed by franchisees?

No, but it is in your interest to stop this from happening as any offences by your franchisees will ruin the reputation of the whole franchise.

Can I dictate how the franchisee sells their business?

Yes, the exit plan outlines the process by which franchisees can sell their business.

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