Graham Billings, executive director of the Franchise Association of New Zealand, has tips for those taking on an established business model.
Buying a franchise can be a less risky way of starting up your own business, but it is all about choosing the right one and doing the appropriate due diligence. It is a relatively mature industry in New Zealand, with more than 80,000 people employed in the franchise sector.
We are looking to buy a franchise for our first small business, because we like the idea of having the support of a franchise network. What should we be looking for in a good franchise business?
Franchise systems that are members of the Franchise Association of New Zealand (Fanz) are required to comply with best practice standards as set out in the Fanz Codes and Rules. Fanz provides ways in which franchisees can ask for Fanz assistance in the case of disputes - that is why we always recommend that prospective franchisees buy from a member of Fanz.
That being said, there are a number of key factors that you should ensure you investigate as part of your due diligence. The legal documentation that will be provided by your prospective franchisor should be complete and provide full disclosure of all the matters that could potentially affect you as a franchisee and information about the franchise system itself. The franchise agreement should provide a cooling-off period so that you are not rushed into making a decision, and it should provide a clear statement about dispute resolution. Most importantly, you should make the time to talk to existing franchisees of the system and get their feedback on what it is like to operate as a franchisee.
One of the advantages we see to taking the franchise route is you have a franchisor who is working full-time on spreading the word of your brand. Is this what happens in every case?
Just as there are differences in all business, you will find varying degrees of support and marketing activity in franchise systems. While the overall marketing for the franchise brand is the responsibility of the franchisor and you may well be required to contribute advertising dollars as part of your franchise fee, you need to remember that it is your business and that successful franchisees also take responsibility for developing their own local markets.
You need to decide whether the franchisor has set a fair franchise fee so that you get value for money and, ideally, where the franchisor's financial success is linked to your future success.
We haven't decided which business to go into yet. Are there any types of businesses which are especially well suited to a franchise?
The franchise model is operated across all sectors of business. In New Zealand, franchising has comparatively fewer businesses in the retail sector compared with many other countries, but is comparatively stronger in home and business-to-business services. A Massey University survey has shown that most franchising takes place in the service sector, with personal services, and administrative and support services making up 38 per cent of all systems in New Zealand and more than 50 per cent of all franchisees. The retail trade makes up 24 per cent of franchisors, but only 7 per cent of franchisees. The accommodation and food services sector accounts for a further 17 per cent of franchise systems and 11 per cent of franchisees.
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