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A good way to get into business in New Zealand is to buy a franchise. A franchise is an agreement where a business (‘the franchisor’) licences their business plan, intellectual property and model to another individual or business (‘the franchisee’) in exchange for payment through periodic ‘franchise fees’. The benefit of buying a franchise instead of starting your own business is that you can take an already proven business model and apply it to a new location. Most franchises come up with a franchise manual that shows you exactly how to set up your franchise to get the most out of your business. However, as this article will discuss, there are three key things to consider before buying a franchise.

1. Due Diligence

Always undertake due diligence before buying any business and make sure that you know you can meet your financial obligations. Due diligence is the act of investigating a business before entering into a contract with your franchisor. You should take extra caution to ensure that a franchise’s model is working before you buy into it.

Even though the Franchise Association of New Zealand’s (FANZ) Code of Conduct will bind most franchisors, they will present their business in a way that will convince others to buy into it. Therefore, it is critical that you do your own independent research. 

The main thing to consider is whether the franchise you are buying will be successful. Like all businesses, some franchises will do well in certain locations. Therefore, you are responsible for conducting market research before you dive in. It is helpful to create your own business plan with your style and forecasts to see if you believe your franchise will work. Always do your due diligence before buying any business and make sure that you know you can meet your financial obligations.

2. Franchise Agreement and Manual

The franchisor has operational documentation they can provide you with to help you understand and run your franchise, should you purchase it. These are the franchise agreement and franchise manual.

Franchise Agreement

A franchise agreement is a legal document outlining how the legal relationship between you and your franchisor will work. You may need to add some clauses to make sure that you are protected as a franchisee. As with any legal document, it is prudent to get a lawyer to look over it. 

Franchise Manual

While the franchise agreement will dictate your legal relationship, the franchise manual will describe your actual relationship. It will show you: 

  • how to set up your company; 
  • the most effective supply chain; 
  • intellectual property guidelines;
  • how to maintain brand integrity; and 
  • much more. 

The main points to look out for in a franchise manual is making sure:

  • that you are comfortable with the way that the franchisor can dictate your own business; and
  • any changes that the franchisor makes does not derail your own business, as a change may work well somewhere else but not for your particular franchise.

There may also be competition law issues if your franchisor is selling the same products as you. This is because your franchisor may be considered in direct competition with you. Therefore, your franchise agreement may be considered collusion if not addressed correctly. A lawyer will be able to tell you exactly what to put in a franchise agreement so that you avoid legal trouble.

3. Exit Plan

When buying a business, you must think about your exit plan as one day you will want to sell the business. Some franchise agreements will have a built-in resale structure so that franchisees know exactly how to exit the business. If there is not a structure, it is a good idea to discuss adding an exit plan clause in your franchise agreement. This allows both parties to agree on the best way to sell the business at some time in the future.

The franchisor can also terminate a franchise agreement if you break the termination clause in your franchise agreement. Always make sure to look over this clause before you buy a business in case there is anything that may put you at risk.

Key Takeaways 

Always make sure that you do thorough due diligence on a business when buying a franchise. It is important that you are happy with everything included in the franchise agreement and that you are not caught out with any nasty surprises. When initially getting into a franchise, it is useful to decide what your exit plan is, to prepare you with how to sell the business when the time comes. Further, it is always good to note that your franchisor can terminate your contract through the termination clause, so be wary that you are not breaking any of these rules. 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

How should I conduct my due diligence?

It is always good to delve deeper than just what the franchisor gives you. Conduct your own independent research by checking out the market as a whole and talking to other franchisees. This way, you will get a clearer picture of what the business is like.

Can a franchisor terminate my franchise?

Most franchise agreements will have a termination clause. If you break this clause, then the franchisor can opt to terminate your contract. Always get a lawyer to check over this clause and the agreement as a whole before you sign.

Do franchisors have to join FANZ?

No, it is not a requirement to. However, most franchisors do join, and therefore, the code of conduct binds them.

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