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A great way to get into business in New Zealand is to buy a franchise. A franchise allows you to own a company whilst minimising hassle and risk. In a franchise agreement, a franchisor licences their business plan, intellectual property and model to another individual or business, who becomes the franchisee. This allows you to expand your business whilst using someone else’s labour and capital. However, like all businesses, there are a few critical mistakes to avoid when opening your franchise. This article will outline what they are. 

1. Too Much Debt

Like all business, debt matters when you buy a franchise. Over leveraging a franchise is the main reason why they fail, and this is often fueled through exaggerated sales projections. When you buy a franchise, make sure that you use as much cash as you can to avoid having to scrape the bottom of the barrel to service your debt. There is a chance that if you over-leverage your business, it may not survive the initial growth stage. 

Some franchises may survive with a large amount of debt, so always make sure you do your due diligence to ensure your business or industry can handle the debt you are borrowing. 

2. Not Following the Business Plan

Some franchisees also feel as if they can do better than the business plan that they have been provided. The business plan will be given to you as a part of the franchise manual, which will tell you the step by step process of operating your franchise. It is important that you follow this plan as it is proven to be successful. 

It may also be part of your franchise agreement that you have to follow certain provisions in the plan. If you are caught breaking these provisions, then the franchisor may be entitled to terminate your agreement through the termination clause. Therefore, you must follow the business plan and take heed of the advice given to you by your franchisor so that you can get the most out of your opportunity.

3. Tax Issues

Some franchise owners may be unaware of the tax obligations they may face. At times, franchise owners may use money that should be put aside for tax purposes, to deal with the day to day costs of running a new business. Some of the taxes that a franchise owner will need to think about include:

  • Company Tax;
  • Goods and Services Tax (GST);
  • Pay as you Earn (PAYE); and
  • Non-Resident Withholding Tax (NRWT).

Make sure that you have the right knowledge when it comes to paying your taxes. If you feel as if you do not have a good grasp on the matter, you should seek the advice of an accountant or lawyer before you buy your franchise.

4. Rushed Decision-Making

Common mistakes made by many franchise owners is that they rush into buying their franchise without conducting proper due diligence. Due diligence is the thorough examination of a business before purchasing it. Usually, this involves reviewing the business’s financial report and looking at the market as a whole. Due diligence should be conducted on the franchisor’s business to gauge how successful it has been. When proper due diligence is conducted, a potential franchise owner can be more comfortable with their purchase as they know that the initial franchise is successful. 

The Cost of Franchise Mistakes

If you find yourself in a dispute due to a mistake that you made, the legal costs can be very high. The most effective way to resolve a dispute is through a form of dispute resolution, such as negotiation. If this does not work, then mediation is your best bet. This process involves appointing a mediator to bring the two parties to a justifiable solution. It is always best to settle out of court, but if you find that you have no choice, then you can also engage in litigation. It is best to seek legal advice before making this decision.

Key Takeaways 

At the end of the day, buying a franchise is an important financial decision, and when you sign the contract, it is legally binding. This is why you should strive the avoid the franchise mistakes referenced in this article. Many franchise owners might rush into franchise deals, or they may over gear themselves with debt. Always look at your franchise with a holistic view to gauge how your business might function. What works for one franchise may not work for others, so it is extremely important that you take on the advice of your franchisor as they have already built a successful business. If you are looking to buy a franchise and need legal advice, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

Do I have to follow the franchisor’s business plan?

This depends on what is in your franchise agreement. However, you will more than likely have to use the same branding and supply chains as your franchisor.

Does FANZ offer dispute resolution services?

Use all members of FANZ are entitled to dispute resolution services.

What is due diligence? 

This is the process of carefully examining a business before purchasing it. Usually, this involves reviewing the business’s financial report and looking at the market as a whole.

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