By Andrew Skinner - 15 May 2020
The impact of COVID-19 may be felt for many months to come
and will result in a number of people considering a change of
direction or career. For some, the prospect of buying a business
and being in more control of your own destiny will be
appealing. Franchising will be a popular option for those who
have not owned a business before and a number of franchisors have
seen their levels of enquiry increase over the lockdown
period.
Franchising gives people the
opportunity to own their own business but also to be part of a
structured system that provides mentoring and guidance. During the
current crisis, it has been valuable for franchisees to be part of
a wider franchise system to receive support regarding dealing with
suppliers, landlords and understanding the Government assistance
available. These are just some of the benefits of being part of a
franchise system as opposed to being out on your own.
What is Franchising?
Franchising is a contractual arrangement where the person who
owns a system for operating a business (the franchisor) grants
another person (the franchisee) the right to use that system to run
a business for a defined period and subject to certain conditions.
In return for being able to use a proven business system, the
franchisor places a number of obligations and conditions on the
franchisee so as to maintain the integrity and consistency of the
system and to protect the franchisor's reputation. The obligations
are contained within the franchise agreement and the business
system manual and these will often be comprehensive and lengthy
documents.
Unlike many overseas jurisdictions, New Zealand does not have
any franchise specific laws which specifically govern the behaviour
of franchisors and franchisees. There are no mandatory franchisor
disclosure obligations and so the caveat emptor principle
(buyer beware) is absolutely applicable and puts the onus on a
prospective franchisee to ask the right questions and satisfy
themselves as to the opportunity. If, however, the franchisor is a
member of the Franchise Association of New Zealand (FANZ), then the
franchisor is obliged to produce a disclosure document prescribed
by FANZ that will cover some important information.
How to Choose a Franchise System?
As with any major purchase in life, there are many aspects to
consider when looking at franchising and you will want to make sure
you take your time and do your homework. There are over 600
franchising systems available in New Zealand and the different
opportunities continue to grow. Franchising is very popular in the
cleaning, food retail and residential building sectors to name a
few.
The Franchise New Zealand magazine is a respected source of
information (available online at www.franchise.co.nz) and you will find many
tools to assist with your decision making. Buying a franchise is
not an easy option and there will be a lot of hard work, especially
in the early years. Each franchise system is different and, in my
view, its success is a combination of many factors, including the
reputation of the brand, the strength of the system and the calibre
of the people involved.
New or Existing Franchise?
Once you have chosen a sector that interests you then you will
need to review what opportunities are available. It may be possible
to start a new franchise in your chosen area or you will need to
look at existing franchises that are for sale. A new franchise
provides you with a clean slate to grow your business but you need
to be well financed and prepared to accept that it may take some
time to generate a sustainable revenue. You will also be
purchasing the franchise directly from the franchisor and will most
likely need to pay an upfront franchise fee.
If you purchase an existing franchise this will probably be
through a business broker and you will be acquiring the business
assets of the former franchisee. This is likely to be more a more
expensive option but should give you a client base on day one. The
franchisor still needs to approve of you buying an existing
franchise and your agreement to purchase the business will need to
be conditional on obtaining franchisor approval (including
approving the franchise agreement).
Get the Right Advice
Having found your preferred system and deciding you wish to
proceed, before signing anything you should obtain specialist
legal, accounting and banking advice.
Franchising is a contract heavy arrangement and a typical
franchise agreement is usually weighted in the franchisor's favour
to ensure compliance with the system and to enable the franchisor
to act quickly to protect brand reputation. However, it is
important that the franchise agreement remains commercially
realistic and specialist legal advice is required to advise you
whether the franchise agreement has gone too far and is overly
onerous. In particular, attention will need to be paid to the
sections on start up costs, on-going payments, potential liability,
restraint of trade and guarantee sections. With that in mind, and
as with any negotiation, it is important to proceed cautiously and
not to invest too much emotionally or financially prior to
reviewing the franchise agreement.
One area to be particularly careful of is that a typical
franchise agreement will exclude any responsibility for any
statements or representations made by the franchisor during your
discussions. If any of the responses from the franchisor are
particularly important in terms of your decision making then you
need to consider requesting the franchisor's claims are included
within the agreement. If there is reluctance on the part of the
franchisor, then you will need to place less reliance on those
representations.
Getting specialist accounting and banking advice is equally
important, especially if you need bank funding to purchase the
franchise. Not all accountants and major banks are actively
involved in franchising and so you need to make sure you are
talking to people with experience.
Next Steps
Franchising is a great way to own your own business with the
support and structure of a franchise system. However, as with any
major decision, you need to thoroughly do your homework to ensure
your expectations will match the reality. This article provides an
overview of some of the important issues but obtaining the right
advice to guide you through the process is very important. If you
have any queries regarding franchising contact Andrew
Skinner.