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Buying a franchise outlet can potentially be an excellent way to buy your own business, change up your lifestyle and gain new skills, particularly if you have not owned a business before and need assistance to establish your own business. However, there are a bewildering array of franchise systems in New Zealand, and you may be unsure which franchise is right for you. This article will outline the key issues you should work through when considering buying a franchise business. 

1. What Can You Afford?

Franchising is a potentially rewarding way to enter into the business ownership experience, but it generally has a high upfront cost than a comparable ‘unbranded’ or ‘non-franchised’ business. To set up a successful franchise outlet, you will have to:

  • pay an upfront franchise fee to enter into the franchise;
  • provide ongoing franchise fees to your franchisor; 
  • pay your employees and other costs of running your business; and
  • pay to lease your franchise premises.

Alongside these costs, you will also have to continue meeting your other financial commitments, such as: 

  • your own personal spending; or
  • repaying any money you have taken out to run your franchise. 

There are two principal reasons why you would invest in a franchise, compared to ‘going it alone’ and starting a similar business without purchasing a branded franchise.

Higher Expected Profitability

The first is that the higher costs are more than compensated for by the higher expected profitability that is likely to arise due to the brand’s strength. In simple terms, the money you receive by being associated with the brand more than compensates for the additional franchise costs.  

Proven Business System

Second, the systems and knowledge passed on to you as a franchisee greatly accelerates your ability to operate successfully with a proven business system. In other words, you are buying a ‘business in a box’ which should answer all your questions relating to the operation of that business, instead of spending months (or even years) making mistakes yourself. As part of this feature, there may even be unique products or offers that are impossible to obtain without being part of the franchise network, for example, unique products or special valued recipes or ingredients.

Other Considerations

With any franchise, you should ask yourself these two questions:

  1. am I getting a valued brand that will result in higher revenue and profitability compared to ‘going it alone’?
  2. am I getting a proven and comprehensive business system that will allow me to enter the market with confidence? 

Both questions do not necessarily need to be answered with 100% confidence. For example, a new franchise system may not be well known and may not result in a substantial increase in sales simply by being associated with the brand. However, it may have a very professional business system or new product that you are confident will more than compensate for the higher upfront costs.

It is important to consider the offer objectively and compare it to the operation of a non-franchised independent business. This is because a non-franchised business is potentially the alternative should you not find a franchise system attractive.

Your Budget

You should also enter into a franchise that fits comfortably within your budget. You do not want to invest time and resources into a business, only to have it fail due to a lack of funds. However, you do not have to say ‘no’ to the perfect but more expensive outlet indefinitely. Instead, you can start off with a smaller and less expensive business, sell this initial investment and move on to a larger franchise later. 

If you have a larger budget, you may consider buying multiple franchise outlets at once. This technique is known as multi-unit franchising. These outlets could belong to the same franchise or be spread across different franchises. Under multi-unit franchising, you will appoint managers to run your individual outlets whilst you ‘work on’ your franchise and your operating systems.  

2. What Industry Do You Want to Enter Into?

In New Zealand, almost all industries contain successful franchises, such as:

  • food and beverage;
  • building;
  • home services, such as gardening or lawn-mowing; and
  • business support services. 

You will want to ensure that the franchise you enter into has a stable and profitable future. Similar to your budget, you do not want to invest time, effort and resources into a business that does not have a sound future. These factors are dependent on the franchise industry. To determine the state of different franchise industries, you should:

  • look at franchise industries that have had increasingly improved sales in previous years;
  • speak to franchisees or business owners about the state of their industry; and
  • consider how technological advances will impact different franchise industries. Will that line of work be diminished or enhanced by technological advances? 

3. What Franchise Suits You?

You will also want to enter into an industry and a franchise that suits you. Different franchises require different skills from their franchisees. 

For example, running a food and beverage franchise will require you to deal well with members of the public, whilst a business support franchise will require you to have an area of expertise in that particular line of business. 

It will usually make sense to enter into a franchise conducive to your special skills or expertise. However, some franchisors are wary of franchisees with pre-conceptions on how to conduct work in that industry. You do not want to bring in rigid habits that could be detrimental to the growth and evolution of your business and franchise. 

Talk to your friends and family about the line of work and the franchise that would suit you best. 

4. Due Diligence

Once you have narrowed down your options, you will now have to start looking at individual franchises. This process is known as due diligence. Due diligence involves checking the finances, assets, liabilities and overall potential of the businesses you are interested in purchasing. Most importantly, it involves contacting other existing franchisees to ask about their experience in the franchise and their opinion on the brand’s future. Although some franchisees are understandably reluctant to talk; some others may give valuable insights into the franchise that the franchisor is not willing or able to provide.

When purchasing a franchise, it is important to carry out due diligence on the franchisor. You should look into their business experience, any disputes they have been involved in, and the level of support they provide their franchisees. 

Disclosure Document

In New Zealand there is no strict legal requirement to issue a disclosure document, as there is in Australia and other countries such as the United States. However, to be a member of the Franchise Association of New Zealand (FANZ), members need to comply with the voluntary code of conduct which includes providing prospective franchisees with a disclosure document in compliance with the requirements of the Association. Therefore, being a member of FANZ in New Zealand is a valuable confirmation that the franchisor treats compliance seriously. You should confirm whether the franchise you are looking at buying into is a member.

Due Dilligence Tips

To carry out effective due diligence, you should:

  • examine each franchise’s documentation. You will usually be provided with a disclosure document and franchise agreement for each franchise you are interested in;
  • talk to the franchisor. You should ask the franchisor an array of questions to determine the nature and potential of their franchise; and
  • speak to franchisees and staff of each franchise. These individuals will be able to provide you with insight into what each franchise is really like. 

5. Get Expert Advice

At this stage, you should have a good understanding of: 

  • your preferred industry;
  • your price range; and 
  • the particular franchise that suits you best. 

Before you sign the franchise agreement and purchase an outlet, it is crucial that you get professional advice. You should consult with an accountant and a lawyer that has franchising experience. An accountant will be able to verify any projections that your potential franchisor has made and help you put together a plan to get the most out of your investment. A lawyer will be able to read through the franchise agreement and ensure that you are aware of all of the implications that accompany entering into that contract. 

Once you have obtained this professional help and feel comfortable in your franchise choice, you are now ready to sign the franchise agreement and get started on running your business.

Key Takeaways

Purchasing a franchise can be an incredibly rewarding business venture. However, buying a franchise is not something you want to rush into. You must put a lot of time into determining which franchise is right for you. This process should involve:

  • figuring out what your budget is for buying and running a franchise;
  • determining the longevity of different franchise industries; 
  • considering what franchise will suit you best;
  • carrying out due diligence on particular franchises; and
  • consulting franchising experts. 

If you are contemplating buying a franchise, contact LegalVision’s franchising lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

How much does it cost to buy into a franchise?

The cost of buying a franchise outlet will differ depending on the franchise. It is crucial that you buy a franchise that fits into your budget.

Why should you buy a franchise?

When you buy a franchise, you get the benefit of owning your business but running it under a pre-established and effective business model. 

What is a negative to buying a franchise? 

Buying a franchise, like buying any business, is a big decision. It can be more expensive than operating an independent business so due diligence is essential in confirming that the costs are more than compensated by the strength of the brand and/or the business system. 

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