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If your business is going well and you are looking to expand, you may want to consider franchising. Franchising involves licensing your business model to another individual in exchange for a periodic ‘franchise fee’. This method is popular in New Zealand as it is a good way to expand your business whilst using someone else’s labour and capital. This article will explore some issues you may face when franchising your business.
Pilot Operation
The main issue that businesses face when structuring their franchise is that they franchise their business too early. Before you consider franchising, your business should have a business model that has been proven to work effectively. A franchisee needs to see that you have an effective business model, and only then will they be willing to buy into your franchise.
Franchise Agreement and Manual
The legal document that will underpin your franchise is the franchise agreement. The franchise agreement sets out the regulations that you (‘the franchisor’) and your franchisee will need to follow. However, the document that will form how your franchisor/franchisee relationship behaves is your franchise manual. The franchise manual gives the franchisee guidance on how they should set up the franchise in accordance with the franchisor’s model.
It is important that the franchise manual clearly states how you want your franchisee acting. After all, your brand and reputation are on the line and you do not want a franchisee ruining it. There are some key things that your franchise manual should do. It should:
- set out procedures and guidelines for the franchisor/franchisee relationship. This includes defining the standards in which the business operates and how the work is done;
- act as a complementary, enforceable and upgradeable part of the legal agreement;
- prescribe control mechanisms;
- maintain brand integrity;
- maintain a tangible record of your intellectual property;
- act as a training tool for franchisees and the franchisor staff;
- add value to the business; and
- provide an exit mechanism for both franchisee and franchisor.
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Clear Communication With Franchisees
It is extremely important that there is clear communication between the franchisor and franchisees. The reason for this is because the actions of your franchisee can affect your own franchise. You should consider setting up regular meetings with your franchisees to make sure that they are following all relevant law. Even though you are not directly responsible for the actions of your franchisees, any laws that your franchisee breaks can affect the reputation of your business.
It is also important to stay in contact with your franchisees to discuss any changes to the franchise agreement and the franchise manual. For example, you may want to:
- negotiate franchise fees; or
- discuss new intellectual property that needs to be added to the agreement.
Issues With Competition Law
In 2020, New Zealand laws changed in regards to competition between a franchisor and a franchisee. There may be a need to add a clause into your franchise agreement on ‘cartel arrangements’. A cartel is a group of entities that collude with each other to affect prices in the market.
In some franchise agreements, there will be clauses that set the prices that a franchisee can sell its products for, as to not undercut the other franchisees. There should be ‘cartel provisions’ that account for this in your franchise agreement. You will need these clauses in a number of scenarios where competition between parties is seen to be happening, such as where:
- the franchisor is in direct competition with a franchisee;
- a franchisor sells online direct to consumers, but a franchisee sells their products in retail; or
- franchisees are in direct competition with each other.
Key Takeaways
Franchising your business in New Zealand is a good way to expand your business without having to come up with the extra capital yourself. If you have a good business model and can see it working in other parts of the country, then franchising seems like the most logical way to go. It is important that you take note of some of the issues that can occur when franchising and act accordingly. Always make sure that you have a lawyer look over your franchise agreement in order to make sure that all the relevant clauses are added so that you do not get locked out of your own hard work. If you need legal assistance with purchasing a franchise, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.
Frequently Asked Questions
Any business can be franchised, but how well your business is doing will determine whether anyone will buy into your franchise. Never franchise too early into a business’s cycle or you could risk losing all the effort that you have put in.
The franchise agreement is the legal document that outlines the legal relationship with your franchisee. Your franchise manual is a guide as to how you want your franchisees set up and how they are expected to behave.
Your franchise agreement will cover for any franchise going ‘rouge’. In any case, there will usually be a termination clause in your franchise agreement. If a franchisee is breaking this provision, then you are entitled to terminate the agreement.
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