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Finding the right franchise print Print

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Because franchising is simply a way of doing business and not a business in itself, the first question you should ask yourself is what sort of business you want.

An accounting franchise is very different from a fast food franchise which is very different from a lawn-mowing franchise. Key to any decision will be your personal circumstances and you should give serious consideration to things such as:

  • Your personal goals
  • The operating hours
  • Your ability to manage staff
  • The type of customers you will be dealing with
  • The level of skill involved in running the business
  • The physical demands of the business.

 Once you've started to look for a franchise that may interest you, it's important to go about the evaluation process in a systematic way. We've outlined a series of ten steps to help you assess whether a particular franchise is going to be right for you.

 It is not an exhaustive guide and is not applicable to every individual franchise, but it will help you to understand what to expect along the way.

 To begin with, we cannot over-emphasise the importance of including your professional advisers - your accountant, lawyer and bank manager - in the process of choosing a franchise. Ultimately of course, the choice of a franchise is yours, but there are many aspects of franchising where you may require professional advice and expertise. There is no rule about when you should involve your advisers, but generally, the earlier you speak to them, the more guidance they will be able to offer.

 

Step one

What sort of franchise do you want?

Very often the first step is to browse through the Franchise New Zealand magazine. There is a guide at the back of the magazine that lists some of the available franchises inNew Zealand.

Alternatively, simply start thinking about the types of industry that appeal to you and the type of business you could see yourself operating.

 Some other good sources of information are:

  • Business agents - the Yellow Pages® or other print or online directories will have listings of agents in your area
  • Websites such as nzbizbuysell.co.nz have listings of franchises and other businesses for sale
  • The Businesses for Sale section of the newspaper
  • Individual franchisors should be able to advise if they have new opportunities or existing franchisees looking to move on.
     

The table below provides a basic guide to the approximate in-going cost of various types of franchise businesses. There will be many franchises within the categories listed that fall outside the indicated investment range. That doesn't mean they are exceptionally cheap or exceptionally expensive - it depends very much on the individual business and you should seek professional advice. You should also be aware that prices can vary widely between franchise systems and even within the same system depending on factors such as location, size and rent. If buying an existing franchise business, the cost will often be higher due to the goodwill in the business.

Business type Set-up costs from Examples
Mobile services $30-70k Mobile mechanic, dog grooming
Professional services $10-80k Accounting, computer repair, business training
Financial services $30-50k Mortgage brokers, financial planners
Food and beverage $150-350k Cafes, bakeries, fast food outlets
Building and repair $20-100k House building, paving, window repair
Cleaning and maintenance services $10-30k Lawn mowing, home cleaning, commercial cleaning
Retail $150-350k Video, stationery, copy shop


Step two

What sort of franchise can you afford?

Franchises vary widely in their initial entry costs and their ongoing fees and royalties. It may help at this early stage to work out roughly what sort of franchise you can afford and whether you will need to obtain finance.

 

Step three

Getting more information

Once you have identified some preferred industries in which you might want to operate your franchise, it's important to evaluate more than one opportunity within each of them. Normally there will be several franchisors to choose from so you should make contact with and compare a number of systems.

Once you have had an initial discussion(s) with a franchisor, usually over the phone, many will send you some formal information on the franchise proposition. This can range from a one-page document to a more detailed Franchise Overview or other marketing document.

Whatever material is sent, you should read it in detail and make a note of the key points or queries that arise - these will form the basis of some of the questions you will ask the franchisor at your first interview.

At this point you may also need to prepare a CV, which the franchisor will want to see. 


Step four

Meeting the franchisor

There's no substitute for face-to-face meetings for helping you to assess a franchisor and their organisation.

A franchisor will sometimes elect to have you meet first with a local representative or broker, especially if you don't live in the franchisor's city/town/region. Make sure however that you stay in touch with the franchisor, especially towards the end of your evaluation process. When you do meet the franchisor, the key things to look for are the quality of the franchise and the franchisor's business experience. Don't be afraid to ask plenty of questions and ask for more information - if it is available at this stage. Bear in mind that some franchisors may not be willing to divulge more information until you have signed a confidentiality agreement.

 

Step five

Application forms and confidentiality agreements

Just as you are seeking information about the franchisor and their business, a franchisor will want to know about you and your qualifications and previous business experience (and those of your partner, if applicable).

The franchisor will also need to be aware of your financial resources and obligations at an early stage, to be sure that you can meet the entry fee and working capital requirements. You should also be prepared to provide references about your character and suitability for the franchise and for the franchisor to run a credit check on you.

A signed confidentiality agreement is a normal part of this process, since the franchisor will be divulging the confidential details of their operation to you.

 

Step six

Market research

You should independently investigate the market conditions and potential for your proposed franchise.

Your enquiries should include:

  • Current and projected market share
  • Whether it is a growth industry
  • Key market trends
  • Local, national and international competition
  • Market threats and opportunities.

 

Step seven

Site/Field visits and interviews with franchisees

Your next step should be to speak to some existing franchisees to understand how they operate day to day, whether the business has met their expectations and how they are performing financially. The franchisor usually encourages this.

You should also verify any information that the franchisor may have given you.  

 

Step eight

Further interviews and discussions

Once you have completed the steps above, you may wish to interview more franchisees (the operators you visited or the site visits you made may not have been representative) or ask the franchisor further questions.

You should take whatever time you need to resolve any questions or doubts and should not enter into a Franchise Agreement until you are certain that it is the right step for you.

 

Step nine

Company research and reference checks

In addition to the information you receive from the franchisor, your solicitor may wish to undertake checks and enquiries to ensure that the franchisor is reliable and competent and that the business performs as has been represented to you. Those checks should include:

  • Company records, including details of directors and shareholders - these are available from the New Zealand Companies Office - companies.govt.nz
  • Whether any complaints have been made to the Commerce Commission or similar agency
  • Whether any legal actions are pending against the company or its franchisees.

 

Step ten

Reaching a final decision and signing the Franchise Agreement

Once you are comfortable that you have all the necessary information at your disposal, the final decision rests with you. You should seek the advice of professional advisers in the decision, but it is your money and your business, so the final decision must be yours.

If you are uncomfortable with any aspect of the Agreement, you should seek clarification. Most Agreements will also have a 'cooling off' period (usually seven days) during which you can break the contract.

 

Assessing a franchise: a bank's perspective

Franchise businesses can have high success rates and are therefore often considered a lower risk by lenders. What that can mean is that a lender is prepared to lend more against a business backed by a reputable franchise system than it would to a stand-alone business. A lender may also be prepared to lend to a franchise business at a more favourable rate.

However, a business will not be considered a low risk simply because it has a franchise label on it! If franchising is the replication of a business system, it goes without saying that if the business system is

poor, franchising will only propagate the problem. So, what can you learn from the lenders when assessing a franchise system? Generally, there are three key factors that ANZ has found in successful franchise systems:


1. The number of franchisees

A greater number of franchisees in a system indicates that the business can be successfully replicated. Two or three franchisees may be due to good luck rather than good management.*


2. The length of time the franchise has been operating

The length of time that a system has been successful in the market over time is also important. Rapid growth can give the impression that a system is successful, yet there are many that have opened strongly and then tailed off because there wasn't actually a strong market for the product or service in New Zealand.*


3. The majority of franchisees making an acceptable return on investment

In terms of financial strength, lenders tend to look at how the franchisees are operating rather than concentrate on the franchisor's bottom line. A key indicator for lenders is the return on investment (ROI) - i.e. how much profit each franchisee is making as a percentage of business investment. A benchmark for ROI used by many banks is around 25%.

* It is extremely important to point out that whilst a well established system may reduce some of the risk, many franchisees have enjoyed huge success by getting into good franchise systems early on. You should use your own judgement and the advice of your professional advisers to make a decision on a particular franchise system.

 

Further information:

To talk to an ANZ Business Specialist:
Call 0800 269 249
Visit anz.co.nz/business
Visit your nearest ANZ branch

        

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