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If you are looking to get into business but want to use an already established business model, buying a franchise may be for you. A franchise is an agreement in which a business (‘the franchisor’) licences their business model to another individual or business (‘the franchisee’) in exchange for payment through periodic ‘franchise fees’. However, before buying a franchise in New Zealand, you must understand the pros and cons. This article will outline what they are. 

The Pros of Buying a Franchise

1. Skip the Startup Stage

A benefit of buying a franchise is that you get to skip the startup stage of a business which is usually the hardest part. There is no need for you to raise capital or debt to fund the start of your business. As 90% of startups fail, skipping this step allows you to dive straight into your business’s growth cycle, which is where profits and revenue tend to climb. By buying a franchise, there is lower risk involved, and you are more likely to succeed in comparison to starting your own business.

2. Instant Name Recognition

If you are buying a franchise, chances are the franchisor has already developed a successful brand. Therefore, when you buy a franchise, you instantly reap the benefits of a business with a great reputation. This is an advantage, especially when you initially buy the franchise, as you know that you will have revenue flowing into the business at a time when cash flow is extremely important. Name recognition also helps when trying to land contracts with suppliers or distributors as they are usually already familiar with the product. 

3. Work for Yourself

The main attraction to buying a franchise is the ability to work for yourself. When you buy a franchise, you are given independent control of your business to a certain degree.

However, there are still certain regulations that you must adhere to. Generally, these are outlined in your franchise agreement which you would have signed with your franchisor. These rules mostly relate to: 

  • branding; 
  • systems management; and
  • intellectual property. 

These rules keep the franchises consistent over different locations. However, like any business, franchising does give you the ability to run your own business.

The Cons of Buying a Franchise

1. Abiding by the Franchise Rules

As alluded to earlier, when you buy a franchise, you must abide by the rules set out in the franchise agreement. The franchisor usually dictates these rules. You will have some independence in how the business is run, but for the most part, you will be required to follow the franchises: 

  • rules; 
  • system operations; and 
  • instructions. 

If you find a better way of doing something, you could bring this up with your franchisor. However, they are not required to take this on board.

2. High Initial Investment

The initial investment to buy a franchise can be high depending on which franchise you choose to buy into. This initial fee can be hard to put together if you do not have any savings. However, it is important to remember that when you are buying a franchise, you are also buying a successful business model. Therefore, the chance of success is much greater than if you started your own business. Banks are also much more likely to lend you money to buy a franchise, rather than to start your own business. This is because a franchise generally has a successful business model.

3. Ongoing Franchise Fees

Another disadvantage of buying a franchise is the ongoing franchise fees that you are required to pay to the franchisor. These are usually classed as a percentage of your sales revenue and are paid on a monthly basis. It is important that you factor these into your forecasts before you buy a franchise. You may also be required to contribute to advertising or marketing costs as part of your franchise agreement. 

Key Takeaways

Buying a franchise is a great way to get into business without the hassle and risk of starting your own business. It allows you to leverage off an already established brand whilst maintaining some form of independence in your own business. However, like any business venture, there are pros and cons to buying a franchise. Some benefits include that it allows you to:

  • skip the startup stage of a business;
  • leverage the name recognition of an already established brand; and
  • work for yourself.

However, buying a franchise also comes with its share of disadvantages. For example, you must abide by the franchise rules stipulated in your agreement, and you are required to pay periodic franchise fees. Make sure you line up the pros and cons of buying a franchise with your own values to see if buying a franchise is the right move for you.  If you are looking to buy a franchise, contact LegalVision’s franchise lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is a franchise?

Franchising is the process by which a company licences their business plan and branding to somebody else for periodic fees.

Is franchising or starting your own business better?

Depending on the business and the type of person you are, franchising can be better than starting your own business. This is due to the established branding and reputation that comes with buying a franchise.

Are you fully independent as a franchisee?

No, as a franchisee, you are able to run your own business as you please. However, you are bound to the terms that you signed in your franchise agreement. Generally, these will include limitations around branding and intellectual property.

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