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8 Common Risks in Buying a Franchise NZ 

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Buying a franchise in New Zealand can be a great way to start your own business. However, like any business opportunity, there are risks involved. Before you invest in a franchise, it is important to understand the common risks and take steps to mitigate them. This article will take you through eight common risks when buying a franchise in New Zealand and what you can do to address them.

1. Lack of Experience

One of the biggest risks in buying a franchise is a lack of experience. Many people are attracted to franchising because it offers a proven business model and ongoing support from the franchisor. However, you may struggle to succeed in your franchise if you do not have experience in the industry or the skills required to run the business. 

To mitigate this risk, choosing a franchise that matches your skills and experience is important. You should also attend training the franchisor provides and seek advice from other franchisees. By building your skills and knowledge, you can increase your chances of success and reduce the risk of failure.

2. Lack of Support From the Franchisor

Another risk in buying a franchise is a lack of support from the franchisor. While franchisors are often legally obligated to provide ongoing support and training, some may not fulfil their obligations or the amount of support may not be clearly defined. This can leave franchisees feeling isolated and unsupported, increasing the chance of failure.

As such, it is important to research before investing in a franchise. You should speak to existing franchisees and review the franchisor’s track record to ensure that they provide adequate support and training. You should also negotiate the terms of the franchise agreement to ensure that you have access to the support and resources you need to succeed.

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3. High Initial Investment

Franchises typically require a high initial investment, which can be a significant risk for some investors. The initial investment can include:

  • the franchise fee;
  • equipment;
  • inventory; and 
  • other startup costs. 

If the franchise fails to generate sufficient revenue, you may be left with significant financial losses.

As a result, it is important to evaluate the franchise opportunity carefully before investing. If available, you should review the franchisor’s financial statements and projections. You want to confirm the business has the potential to generate sufficient revenue. A financial advisor can also help you to develop a realistic business plan. Further, this financial advisor can help you identify any potential issues regarding your return on investment. It is imperative that you have sufficient working capital during the early stages of your business. This will help you manage operating with lower cash flows before your business grows. 

4. Ongoing Fees and Royalties

In addition to the initial investment, franchisees often have to pay ongoing royalties to the franchisor. These ongoing royalty fees are also known as licence fees. These fees may be based on a percentage of revenue but can also have fixed or minimum amounts. If your franchise fails to generate sufficient revenue, these fees can become a significant burden.

To address this risk, it is important that you understand the ongoing fees and royalties associated with the franchise before investing. You should review the franchise agreement carefully and negotiate the terms to ensure they are fair and reasonable. Similarly, you should also develop a realistic revenue projection statement. By developing an accurate statement, you can ensure that you can cover the ongoing fees and royalties.

5. Restrictions on Operations

Franchise agreements typically include restrictions on how franchisees can operate the business. These restrictions can include:

  • limits on the products or services offered;
  • restrictions on marketing and advertising; and 
  • other operational requirements. 

If these restrictions are too onerous, they can limit your ability to grow the business.

It is important that you review the franchise agreement carefully before you invest. You should understand the restrictions on operations and negotiate the terms to ensure that they are reasonable and allow for growth. 

You should also review the franchisor’s marketing and operational strategies to ensure they align with your goals and objectives.

6. Dependence on the Franchisor

Franchisees are often heavily dependent on the franchisor for ongoing support and training. As a franchisee, you will likely also be reliant on your franchisor for marketing materials. Further, you may also be reliant on your franchisor regarding the provision of supplies, products and services. This dependence can be a significant risk if your franchisor fails to provide you with adequate support. Alternatively, this dependence can also pose a significant risk if the relationship between the franchisee and franchisor breaks down.

It is important that you develop a strong relationship with the franchisor from the outset. You should communicate regularly with your franchisor. Further, where possible, you should also participate in training and support programs hosted by your franchisor. You should also seek advice from other franchisees. Once in the franchise network, you should work to build a network of support within the franchise system.

As a franchisee, you are subject to a range of legal and regulatory requirements in New Zealand. Among others, these requirements include that you comply with consumer protection and employment laws. If you fail to comply with these requirements, you may face legal action and incur financial penalties.  

As such, you should seek legal advice before investing in a franchise. You should understand the legal and regulatory requirements that apply to your business and develop a compliance plan

8. Market Risks

Finally, as a franchisee, like any other business owner, you are vulnerable to market risks. Market risks include changes in:

  • consumer preferences;
  • economic conditions; and 
  • competitive pressures. 

These risks make it critical that you conduct significant market research before investing in a franchise. If the market for your products or services changes, you may struggle to generate sufficient revenue.

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Key Takeaways

Buying a franchise in New Zealand can be a great way to start your own business. However, like any business opportunity, there are risks involved. To reduce these risks, it is important to understand the common risks associated with franchising. Once you understand the common risks, you should take steps to mitigate them. Some of the common risks when buying a franchise include: 

  • lack of experience;
  • lack of support from the franchisor;
  • high initial investment;
  • ongoing fees and royalties;
  • restrictions on operations;
  • dependence on the franchisor;
  • legal and regulatory risks; and
  • market risks.

If you would like help with evaluating a franchise opportunity, contact our experienced franchise lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0800 005 570 or visit our membership page.  

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Emily Young

Emily Young

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