Buying a franchise is a great way to get into business without building a brand from the ground up. However, despite the benefits of franchising, some franchise opportunities are better than others. This article will take you through six key signs of a good franchise opportunity.
This publication provides you with the fundamentals for franchising your New Zealand business, including set up, branding and management.
Brand Awareness
Brand awareness is major asset franchisees inherit when they purchase a franchise. A franchise’s brand is critical because it:
- attracts customers and high-quality franchisees;
- differentiates the brand from others in the marketplace; and
- increases the overall value of the franchise.
Looking for a brand with a significant presence and a positive reputation is essential. Customers rely on brand awareness when selecting where to buy their goods or services.
Costs
The next thing to consider when buying a franchise are the costs involved. This includes the:
- initial investment;
- royalties; and
- marketing fees.
The initial investment is the total funds needed to establish your franchise. This might include an initial franchise fee and other set-up costs such as a fit-out and working capital.
On the other hand, royalties refer to ongoing payments payable to franchisors. This is often calculated as a percentage of your revenue. Similarly, a marketing fund pays for advertising associated with the franchise network. This may also be calculated as a percentage of revenue. Alternatively, it may be a flat fee.
Continue reading this article below the formFinancial Performance
As outlined above, you should weigh up the costs involved in a franchise against the financial performance of the franchise.
Naturally, you will need to decide if you would rather have a lower initial investment but a lower revenue potential or a higher initial investment with a higher return on investment. Regardless, you should ensure that any franchise you are considering has a good financial history and grows sustainably.
Market Opportunity
Next, you should assess the market opportunity. A franchisor will provide information when you express interest in buying a franchise. First, however, you should research the franchise industry.
You want to enter an industry that is growing and sustainable. To help assess the sustainability of an industry, you should ask questions such as:
- How much is this industry’s sales tied to the economy?
- Is the goods or services this business providing a trend, or is it an essential service?
- Can the business be operated remotely, or will I need to enter a commercial lease agreement?
Length of the Agreement
Franchise agreements differ in length. A common franchise term is referred to as a ‘5+’5. This refers to an agreement with an initial term of five years and an option to renew the term for an additional five years.
In other instances, franchise agreements might be 10 years or even up to 25 years. The length of the franchise term will impact what opportunities you decide to pursue. For example, you might be looking for a long-term business opportunity with a short franchise term that will not be suitable. Therefore, negotiate the term of the agreement or find an opportunity more suited to your preferences.
Training and Support
Finally, you need to consider the training and support on offer. A key reason to buy a franchise is to take advantage of the franchisor’s knowledge, guidance and support systems developed to replicate a proven business model. As such, you should look for a franchise that offers substantial training and ongoing support. This might include:
- an induction program;
- ongoing development opportunities;
- on-site training;
- access to conventions and networking opportunities; and
- routine branch visits.
The franchise agreement will detail the training, support, and offer. However, speaking to existing franchisees is another excellent way to determine what support the business will provide.
Key Takeaways
Some franchise opportunities are better than others. Some signs to look out for when assessing a good franchise opportunity include:
- brand awareness;
- costs;
- financial performance;
- market opportunity;
- length of the agreement; and
- training and support.
If you need assistance deciding if a franchise agreement in New Zealand is the right fit for you, our experienced franchise lawyers can assist 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.
Frequently Asked Questions
The initial investment in a franchise refers to the funds needed to establish your business. This includes the initial franchise fee and set-up costs, such as the fit-out and working capital.
Brand awareness is a significant asset that franchisees inherit when they purchase a franchise. A franchise’s brand is critical because it attracts customers and franchisees. Branding also differentiates the brand from others in the marketplace and impacts the overall value of the franchise.
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