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Are you thinking of starting a business in New Zealand, or expanding your current business model? You may wish to do this through franchising. However, before you consider franchising your business, it is best to inform yourself of both the pros and cons of franchising. This article will:

  • outline what franchising is; and
  • address the benefits and disadvantages of franchising a business in New Zealand. 

What is Franchising?

Franchising is a business method through which you (the franchisor) allow another individual (the franchisee) to operate a business (the franchise) for a certain period of time using your:

  • trade marks;
  • branding;
  • products; and
  • operational systems. 

This franchisor-franchisee relationship is created and governed by a franchise agreement

What are the Pros of Franchising?

Franchising is growing increasingly popular in New Zealand. Franchising is not limited to the retail and food industry, but also extends to:

  • construction and trade;
  • business;
  • property; and 
  • personal services. 

This growth and diversity in New Zealand’s franchise market can be attributed to the benefits that accompany the franchise business structure.

Franchisee’s Capital and Labour 

Through franchising, you can expand your business regionally, nationally or internationally using your franchisee’s capital and labour. 

Each franchisee will purchase one, or more, franchise locations or outlets. Further, each outlet will be a self-contained business that the franchisee operates using your trademarks, operation systems and franchise model. In exchange for the use of your intellectual property, you, as the franchisor, are entitled to both an upfront payment for a franchisee’s entry into the franchise and ongoing franchise fees

Less Exposure to Risk in Expansion

Expanding a business that you own and operate yourself can be risky. However, as a franchise owner, most of this risk can be transferred to your franchisees. Instead of starting a new business location when you wish to expand, your franchise expands every time a franchisee purchases a new franchise outlet. This franchisee is responsible for applying your operation systems to ensure this outlet is profitable.

More Freedom

Under the franchise system, each franchisee is responsible for managing their franchise outlet or outlets’ daily operations. As the franchisor, you can have more freedom and time to focus on your core business. You can invest this time back into the franchise, to determine what systems and ideas have been effective and ineffective. This freedom provides you with the opportunity to develop and strengthen your business model in a manner that would not be possible if you had to manage your own premises. 

What Are the Cons of Franchising?

In conjunction with these benefits, starting or running a business, including a franchise, accompanies risk. 

Initial Workload

Setting up a franchise takes a large amount of work and is a time-consuming process. To set up a franchise, you should:

  • assess whether you have a franchisable business model by conducting a pilot operation and a franchise feasibility assessment; 
  • prepare various franchise documents, such as a franchise manual and the franchise agreement you will enter into with each of your franchisees; and
  • advertise for and recruit franchisees.

Once you have set up your franchise, you are still going to have to commit to ongoing franchise management, support and training. 

These processes can be complex and expensive. However, it is for this reason that franchisees will wish to buy into your franchise. Franchisees will buy a franchise outlet to avoid the expertise, costs and time that it takes to create a profitable business model. Once you have properly undergone this initial hard work, you can begin to reap the benefits of franchising. 

Reliance on Franchisees

Having franchisees managing their franchise outlets’ day-to-day operations can be both a pro and a con of franchising. Franchisees are your form of income. How effectively each franchisee runs their franchise outlet determines:

  • your profit returns;
  • whether the franchisee can continue to pay the ongoing franchise fees; and
  • the overall success of your franchise. 

To ensure that you can secure your forms of income and continue to run a successful franchise, you must provide continuing support and guidance to your franchisees. 

Key Takeaways

Franchising is an effective and growingly popular business method. It accompanies:

  • the use of your franchisee’s capital and labour in the running of your business;
  • less exposure to risk in the expansion of your business; and
  • more freedom to focus on your core business. 

However, although there are numerous pros of franchising, ownership is not without its cons. It is a time and resource-consuming process that requires not only a large initial workload but ongoing support of your franchisees and franchise outlets. It is best practice to be aware of both the benefits and risks that may accompany franchising your business. If you are interested in franchising your business, contact LegalVision’s New Zealand franchising lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is franchising?

Franchising is a business method through which the franchisor allows other individuals, the franchisees, to operate a business for a certain period of time using their business model.

What is the franchise agreement?

The franchise agreement is a written document that creates and governs the franchisor-franchisee relationship.

What are the pros of franchising?

The advantages of owning a franchise include being able to use someone else’s capital and labour to run and expand your business, less exposure to risk in the expansion of your business and more freedom to focus on your core business.

What are the cons of franchising?

The disadvantages of owning a franchise include a large initial workload. Also you are dependent on your franchisees for your income and have to provide continuance support and guidance. 

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