KEY POINTS:
There is no such thing as buying your own job despite some people believing that purchasing a franchise does just that. Any financial investment involves uncertainty and becoming a franchisee bears risks as well as the potential for rewards.
Franchises are a growing business sector in New Zealand and people find them attractive because someone else, the franchisor, has already taken the business start-up gamble and now has knowledge and experience to share.
In New Zealand there's no specific legislation to protect either the franchisor or the franchisee.
So it's a case of buyer beware, particularly if the franchisor does not belong to the Franchise Association of New Zealand, the organisation's chief executive Peter Fergusson says.
A code of ethics and practice binds members.
Their businesses are independently scrutinised every second year to make sure standards are met.
"When a buyer sees the logo they have at least some belief that there is a set of ethics and practice behind that company, that they meet certain business standards," Fergusson says.
When buying a franchise, people should perform normal due diligence and take advice at least from an accountant and lawyer experienced in the industry.
Bank staff can be a knowledgeable source if they have dealt with franchises before.
There's lots of paper work involved and the franchise agreement documents need to be carefully analysed, so it's not a thing to rush in to.
"You need to understand what the agreement is so you can make an informed decision, to get past the terminology to look at the results of not doing or doing things," Glaister Ennor associate Louise Quinn says.
People can be naïve and gullible or "see what they want to see" while missing some important things, the lawyer says.
She advises canvassing the terms of supply. Franchise agreements can include compulsory arrangements to purchase product from the franchisor, but people sometimes don't study the ramifications of this part of the deal.
"It is extremely important as the day-to-day operations can be left out of an agreement," Quinn says.
The franchise association has tips for potential franchisees on its website: www.franchiseassociation. org.nz
Fergusson advises a careful check of disclosure documents for information on franchisors' trading entities, financial backing, length of operation, details of suppliers, how sites are selected, and the litigation record.
Check whether the franchise is new to New Zealand or your area, Quinn says. "You are paying for intellectual property and branding and goodwill and if it is new there is no history to see if it will be successful."
The relationship between a franchisee and franchisor is more inter-dependent than a normal business relationship. There are mutual obligations and reliance.
"You are buying into a relationship far bigger than a business relationship," Fergusson says. "You need to know about them and they need to know about you."
Solicitor Toni Payne, from Glaister Ennor, has completed a masters degree on the intricacies of franchise agreements. She says termination provisions are key.
Franchisees face losing up-front costs if the franchisor can terminate the deal for such things as not opening the full required hours. In a normal purchase agreement, the vendor and purchaser mutually agree the terms. Franchise agreements are highly levered in favour of the franchisor for decision-making and the ability to review the terms, Payne says.
Some franchisors will not negotiate the terms as they want standard agreements for all franchisees. Buyers have to be comfortable with this.
Fergusson warns about large up-front fees. While there can be significant costs involved in a retail outfitting, for instance, the fees still need to be queried. If they are backed up by assets it will be evident, he says.
"Business is about risk. You can't buy yourself a job. Beware of get-rich-quick claims. If someone claims there's no effort and no risk involved in a franchise, be wary."
A red flag of caution in the franchise agreement would be the absence of a mediation clause, Fergusson says.
If there's a problem then the relatively reasonable cost of negotiation and discussion should be a franchisee's right, rather than the expensive avenue of arbitration and litigation, he says.
That's something Quinn and Payne agree with wholeheartedly.
Step away from the deal if valid reasons are not forthcoming, Fergusson says. "We tend to be a trusting nation. We are not always good at asking the tough questions."
He believes the breakdown of some franchises comes down to people's perception of what they are sold.
With a franchise you are buying a business with a proven system, format and brand, but people can mistakenly think to change that, Fergusson says.
Also, expectations on payment and support fail and communication can breakdown. "Often people have unrealistic expectations. You need to work 24/7 in the first two years to get the business running."
Fergusson advocates franchisees plan to be debt free within five years. "If not, be wary about why you are buying and how you are securing it."
