You could be a seasoned investor looking for fresh new investments or a newbie, armed with big goals, dreams (and yes, capital!) – but have absolutely no idea how to run a business. A good, common way to put your foot in the door is through a franchise. Franchises have a good success rate after all.
Franchising is where a business provides an individual or business license to use their business plan and intellectual property in exchange for franchise fees. It allows franchisees to take a proven business model and use it in a new location. Most franchises come with manuals to assist the franchisee in their setup and operations.
It does sound easy but without proper planning and execution, any good business plan can go downhill.
If you’re about to buy a business, make sure you undertake due diligence and confirm that you can meet all your financial obligations. You need to investigate the business before you enter into a contract with the franchisor and take extra caution to make sure the franchise business model is working in real life – not just on paper.
The Franchise Association of New Zealand Code of Conduct binds franchisors, thus making them accountable, but they can still present the business in such a way that people will buy into it even when the business model isn’t what it’s presented to be. You have to do your own homework!
How long has the franchisor been in business? They should be able to show you their background information and financial health. They also need to have the resources and commitment to develop the franchise. Will the franchise be taken over by a larger corporation in the future? What are the ongoing fees and royalties and who covers marketing costs? Will you have regular meetings?
One of the most important questions to ask is – does the franchise have a proven track record? Are the profit projections realistic? Ask for the hard facts. Chat with an accountant who has experience in dealing with franchise businesses, and knows the questions you should be asking, and the information you should be receiving.
Do you think the franchise will be successful? Some locations can pull it off, but how about your location? It’s good to conduct market research before diving in. Develop your own business plan with your own forecasts, style and goals to see if the franchise will likely meet them.
Speak with other franchisees about their experience and opinion. Are they getting the right support and has the franchise lived up to their expectations in terms of sales? What territory are you being offered, and do you have competitors in this area?
Another thing to consider is the franchise agreement and manual. The franchisor must provide you with operational documentation to help you run the franchise. The franchise agreement outlines your legal relationship with the franchisor, so make sure you don’t just accept everything.
If you need to add or remove some clauses to make sure you’re protected as a franchisee, get a lawyer to look into it – we can point you in the right direction of a goody! Just make sure you can’t be charged with collusion under the competition law. Does it have a cooling-off period in case you change your mind?
The franchise manual will show you how the company will be set up, the most effective supply chain, intellectual property guidelines, brand guide, and many more. Review the franchise manual and make sure you’re comfortable with how the franchisor can control your business and that any changes should not derail your business in any way.
You must also think about your exit plan as early as now. One day, you will sell the business, so make sure to check any built-in resale structure in the franchise agreement and find out how you can exit the business. If the franchise agreement doesn’t specify this, talk about adding an exit plan clause so both parties agree on the best way to sell the business in the future.
Lastly, make sure you have the right skills to succeed. You should have a good amount of persistence, drive, work ethic, and communication skills. We would say you would need business skills but that’s what we’re here for! If you want to learn more about franchising, just give us a holler and we’ll get back to you quick-smart!
Your Outside Team
Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand
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