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Franchising can offer great business opportunities for both franchisors and franchisees. While they can be a complex system, understanding how franchising works in New Zealand can help your business’ plans for expansion. Alternatively, this particular model can be enticing if you are looking to enter into a business for the first time. This article will provide some background on franchises and explain how they operate within New Zealand.

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What is a Franchise?

Franchising systems can be pretty complex. However, their basic principle is relatively simple. A franchisor is someone who develops a successful business format and operating system. Furthermore, as a franchisor you can allow other people to maintain and operate replicas of your original business format in various locations. The people who oversee these replicas are known as franchisees. To run a successful replica of the original business, franchisors will grant franchisees various rights and provide any support they may need.

Many franchises operate across New Zealand. The origins of these businesses come from both international and national sources. For example, this includes: 

  • McDonald’s; 
  • Coffee Culture; and 
  • New World.

The rights to an original business will generally last for a certain period, which the franchisor will outline in the franchise agreement. A franchise agreement is a legally binding contract that sets out all essential terms of the franchisor-franchisee relationship. In New Zealand, there is no franchise-specific law. Although, it is essential to note that the laws that generally apply to all businesses will also apply to franchises.

How Does Franchising Work?

Firstly, as a franchisor, you will offer your franchisees a ‘blueprint’ of your business and how to run a successful replica. Franchisors often appoint interested and engaged participants to their business model. These participants may be interested in developing the reputation of a particular business or have their own personal interests. On the other hand, as a franchisee, you may purchase an already established and successful business. Doing this will allow you to bypass many of the initial fees and startup costs you would have had going into the business independently. However, as a franchisee, you will need to pay the franchisor various fees and royalties as part of the agreement.

Overall, as a franchisor, you will manage the more executive-level decisions that affect all installations of your business. In contrast, as a franchisee, you will oversee the day to day operations of the local instalment of the original business. 

Consider your local Coffee Culture. A local businessperson will own the cafe and oversee daily operations such as:

  • managing employees;
  • making drinks; and
  • engaging with customers.

However, the franchisor owns the business and allows the local businessperson to use their branding. The franchisor may also coordinate supply purchases to multiple Coffee Culture cafes and oversee other contracts.

What Does a Franchisor Do?

The franchisor is the party who creates the business and finds franchisees to purchase and operate instalments of the business in different locations. Before becoming a franchisor and successfully franchise your business, you need to have a successfully replicable business format. To satisfy this requirement, you must have:

  • an already successful business operation;
  • a clear point of difference to make the business stand out;
  • an established reputation amongst your customers;
  • goodwill in the market;
  • recognisable branding and other intellectual property;
  • summaries of your operating systems, ready for explanation to potential franchisees; and
  • proven sales records and other measures of success.

As a franchisor, you will present this format to potential franchisees, who will consider whether they will sign into your business. However, while a franchisor will benefit from the capital and labour of their franchisees, they will lose some amount of control over their business. 

You will rely on your franchisees to maintain the same quality standard for customers. If a franchisee’s business does not meet the appropriate standards, it will reflect poorly on the overall franchise.

Further, a franchisor’s role will include taking care of administrative concerns so that a franchisee can successfully operate their instalment of the business. For instance, a franchisor may:

  • provide franchisee training to maximise efficiency;
  • develop health and safety standards;
  • provide marketing and advertising campaigns;
  • organise invoicing and quotes;
  • manage bulk supply purchases;
  • purchase equipment or ingredients; and
  • develop websites or apps for directing customer sales.

What Does a Franchisee Do?

As a franchisee, you will receive support to set up the business and make revenue. This will be the essential business of the overall franchise, which will likely involve selling goods or services to customers. 

Additionally, in return for receiving support and resources from your franchisor, you will pay them various costs, which might include:

  • the initial purchase price of the franchise;
  • training fees;
  • a signing on fee;
  • royalties; and
  • annual fees to cover ongoing costs.

Key Takeaways

In short, if you already have a business, franchising in New Zealand may be an excellent way to grow your opportunities nationwide. On the other hand, if you are a businessperson considering running a business, purchasing an existing successful franchise may be a good option for you.

If you need help with setting up or purchasing a franchise, our experienced franchising 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

What is a franchise?

A franchise is a business format where a franchisor allows franchisees to run clone operations of their original business in different locations. In addition, a franchisor will grant their franchisees various rights, such as intellectual property licences.

Should I buy a franchise?

If you buy a franchise, you purchase an already purchased and successful brand name. Therefore, you can avoid some of the pitfalls of new business ownership. However, you lose control over running your business, and you answer to your franchisor.

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