In Short
- Franchises operate under strict guidelines set by the franchisor, ensuring uniformity across all locations. In contrast, dealerships have more autonomy, allowing dealers to make independent decisions regarding operations and sales strategies.
- Franchisees typically pay initial and ongoing fees, including royalties and marketing contributions, to the franchisor. Dealers, however, usually purchase products at wholesale prices and profit from resale, without the obligation of paying royalties.
- Franchisors often provide comprehensive training and continuous support to franchisees to maintain brand consistency. Dealerships may receive product-related training, but operational support is generally limited.
Tips for Businesses
When deciding between establishing a franchise or a dealership, assess the level of control you wish to maintain over operations and brand representation. Franchising offers greater control and uniformity but requires significant support and oversight. Dealerships provide more autonomy to dealers, potentially reducing your managerial responsibilities. Choose the model that aligns best with your business objectives and resources.
Before expanding your business into a franchise or dealership, consider their differences. Both models consist of conducting business using your already established brand’s intellectual property and systems in the market. As a business and brand owner, you must identify which differences affect your business needs to make an informed decision. This article will detail the main differences between a franchise and a dealership in New Zealand.
What is a Franchise?
Under the franchise agreement, you allow your franchisee to use your intellectual property in their business. As a result, your franchisee will use your:
- logo;
- brand name;
- systems;
- products and services; and
- business model.
Often you will need to look for and recruit franchisees. Moreover, many franchisors provide financial, marketing, and sales support to their franchisees. This ensures consistency across your franchise brand.
Examples of franchises include:
- McDonald’s;
- Subway; and
- Zara.
What is a Dealership?
A dealership is essentially a retail distributor. Your dealers will sell your products and services under the name and logo of your company. A dealership aims to help with sales and distribution rather than making products.
Examples of dealerships can include:
- Toyota;
- Mazda; and
- Triumph Motorcycles
Key Differences Between a Franchise and a Dealership
Degree of Control
A critical difference between a franchise and a dealership is how franchisees and dealerships manage operations. Often, an independent business runs a dealership while a franchisee runs a franchise.
In operating a dealership model, you can advise your dealers on how to conduct business activities. However, the dealer does not have to follow your advice. They have freedom when designing the store and dealing with product availability. Moreover, your dealer gets to decide on pricing strategies.
Alternatively, your franchisee is bound by their franchise agreement in a franchise. They must fulfil their responsibilities under the agreement and use your franchise systems. Often, you will decide the:
- design of the store;
- branding guidelines;
- promotional strategies; and
- when products are released to ensure consistency across franchises.
If you aim to have strong control over your business, then a franchise may be the right move.
Fees
Unlike a franchisee, your dealer is not required to pay your fees. Instead, they typically buy products from you at wholesale prices and then sell them at a markup to make a profit. This model focuses on the buying and selling of goods rather than paying for the use of a branded business system. There may be some upfront costs for initial training on the products themselves being sold, but this is something you should consider about how you want to expand and is more limited than typical franchise training relating to running a business.
Any fees expected from the franchisee must be outlined in the franchise agreement. Franchisee fees can include initial and ongoing fees. An initial franchise fee is the one-off upfront fee the franchisee will pay when entering the franchise. This fee helps you cover the start-up costs for the business and gives the franchisee the right to use the:
- brand name;
- training;
- trade mark; and
- franchise systems.
Initial Startup Costs
Setting up a dealership is cost-friendly. Often, your dealer only bears the costs of licencing and purchasing your products. However, you may ask the dealer to pay for the location, business registration, and insurance fees. Any agreements should be made in writing.
Meanwhile, your franchisee needs significant capital to buy a franchise from you. Costs include:
- paying initial franchise fees;
- buying equipment;
- purchasing a licence to use your IP; and
- finding and training employees.
Your franchisee’s costs should be detailed in the franchise agreement. This will reduce future disputes and ensure the franchisee makes an informed decision. Moreover, you should inform your franchisee of any support you plan to give them to help them adjust to the business.
Disclosure Requirements
In New Zealand, a franchise can be required to disclose specific items of information to a franchisee, found under the FANZ Code of Practice, if the franchisor chooses to opt-in to comply with the FANZ requirements. For example, depending on your circumstances, you may be required to provide a franchise disclosure document to your franchisees. This document can contain important information about the onboarding process, purchase details, a summary of obligations, and several other items. However, there is no general requirement for franchisors to make these disclosures outside of FANZ.
For dealerships, the disclosure requirements are generally less strict and tend to vary more based on the terms of the contract you sign with the other party. These agreements are subject to more general commercial and contract law principles. Examples of these broader principles are requirements of honest representation and avoiding misleading or deceptive conduct. This means that disclosure can often be more limited, mainly focusing on the terms a dealer can impose on selling your goods or services.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Key Takeaways
Before expanding your business into one or the other, you must understand the differences between a franchise and a dealership. Firstly, you will have more control over your franchises than a dealership. Moreover, your franchisees must pay several costs, including franchise fees, while a dealership does not. Initial startup costs are also higher for a franchise, while a dealership only needs to purchase a licence from you to sell products.
If you need help setting up a franchise or dealership, our experienced franchise lawyers can assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
You can advise your dealerships on running their business, but they do not have to follow your advice. Hence, you will have less control over a dealership than a franchise.
Converting an existing business into a franchise or dealership depends on the compatibility of your business model with franchising or dealership structures. For a franchise, your business should be replicable, with standardised processes that can be easily taught to others. You will need to establish a detailed business model and operational guidelines. Your product must be in demand for a dealership, and you should be able to secure a supply agreement with the manufacturer or principal company. Consulting with a LegalVision franchising team member can provide you with more specific guidance suited to your situation.
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