Banking on your dream

The profitability of individual franchises can differ a lotDaniel Cloete, Westpac national franchising manager.

Westpac was the first bank to offer a specialist franchise team in New Zealand.

Daniel Cloete has been Westpac's national franchising manager for five years, after owning and managing several franchise businesses himself.  He responds to questions about franchising.

Why should people consider franchising as an option?

Some of the advantages of investing in a franchise are very persuasive: A proven product or service; an accepted brand or trade name that gains you access to a market; a tried, tested and documented way of doing business; ongoing development of a product or concept; training and support; increased purchasing power.

Because we find ourselves in a full-employment economy, franchisors  have found it difficult to find suitable franchisees.  At the same time, many people find themselves with a large amount of equity after the boom in the property market over the past few years. This enables people who have wanted to go into business for themselves to do so, and finance a sizeable enterprise.

How easy is it to get finance?

While business is usually seen as a risky investment, there has been a revolution in franchise financing.

The good news is that because the strong systems and brands of better-known franchise systems tend to considerably lower the business risk, Westpac has been able to take this into consideration.

This means a bank with a specialist franchise unit is prepared to lend against the new business, based on the success of the franchise system and all the other franchisees. Thus, franchisees  need less of their own money and can secure part of the investment against the assets and future cash flow of the business.

How do you choose which franchise to invest in?

The first stop should be to get some  specialist advice because there is a raft of considerations; the industry, the appropriate franchise system  and the individual business where factors like location becomes important.

All these issues are covered in the Westpac Guide to Franchising.

A good starting point is to look at something you will enjoy and that is a good match for your  interests and skills. Then consider the macro issues, like which industries are in a growth phase.

Once you have chosen a particular industry or franchise system, there are some questions to ask yourself about the franchise's product/service:

Is there a real need for this product/service?
How stable is that need?
Is the product/service still growing as a category?
How large is the current market and the potential market?
How much competition is there in the category already?

The most successful and profitable franchise systems tend to share a number of characteristics, such as  good management information systems, ongoing development of the product or concept, and training and support.
 
In a typical franchise system, the profitability of  individual franchises can differ a lot.  In many cases in would be factors like location, competition, the rent paid as a percentage of total turnover, wages and cost control.

Paying too much in rent, poor cost control, not making use of collective purchasing benefits, bad or nonexistent local marketing, lack of owners involvement, shrinkage or strong competition are all factors that can lower the business profitability.

How will the lauded economic slowdown affect  prospects for franchisees?

The franchise business is no different than any other small businesses, in that economic fundamentals tend to influence it.

In general, however, we find that because of their marketing strength, strong systems and constant redevelopment, franchises tend to cope better with downturns.

This does not mean someone buying an existing franchise should not be conservative in their assessment and scrutinise such things as rent charges, the competitive situation or if the business can weather a reasonable downturn in sales.  Your franchise specialist, accountant, lawyer and banker may be able to assist.

What is the franchise association?

The Franchise Association of New Zealand (FANZ) is an organisation representing the franchise industry.

Because there is no specific franchise legislation in New Zealand, Westpac supports the self-regulation provided by FANZ through their Franchising Code of Practice and the association's Code of Ethics. 

The association also offers benefits to its members such as credibility, networking, industry representation, conferences and a mediation panel.

One of the biggest franchise events of the year is the Westpac Franchise Awards, organised by FANZ. It  helps identify the better franchises for potential buyers through recognition of its performers.

Westpac also sponsors the Business Opportunities and Franchise Expo, held every year in Auckland, Christchurch and Wellington. It is a way for our small business customers to identify opportunities in the franchise industry.

At the same time, this creates a marketing opportunity for franchisors, especially systems entering the New Zealand market for the first time.

What's special about franchising from a bank's point of view?

Finance: Overseas research has shown a high failure rate of new independent businesses.

However, with franchise businesses there is a very low failure rate because a franchisee buys a tried and tested way of doing business with a well-known brand, without the problems of establishing a new independent business.

This means a franchise specialist bank can use its knowledge of specific franchise systems to develop funding packages against the assets and future cash flow of new franchise businesses in the better systems.

Thus,  potential franchisees can get bank funding to establish their new franchise, lowering the amount of their own capital required to go into business.

Ease of Funding:  Westpac offers tailored finance and transactional banking packages for franchisees.

Specialist advice: Westpac offers a team of specialist franchise managers  to provide advice, funding and transactional packages for franchise businesses. Because we bank a large number of franchises from the larger well- known franchise systems, we are able to benchmark and add real value for clients applying for franchise finance.

Franchising your business, leveraging your intellectual property for growth: A solid business, doing well in its market, but finding itself at a crossroad regarding future growth may want to consider franchising as a way to quickly and strategically grow the business using other people's money.

Westpac offers a series of seminars  together with specialist franchise lawyers and franchise consultants to assist people who are considering franchising their businesses. Westpac funds system development and provides funding for purchasing the master licence for an overseas master.

For more information, contact the Westpac Franchise Team on 0800 177 007.