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Franchising your business - the fundamentals print Print

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Franchising has grown rapidly in New Zealand over the past decade and many small business people wonder if it’s the answer to growing their business. This article looks at the fundamentals of franchising and other options for growth and expansion.

An overview of franchising in New Zealand

Franchising in New Zealand has enjoyed very strong growth over the past decade. The Survey of Franchising, sponsored by ANZ in co-operation with the Franchise Association of New Zealand, showed that the franchise sector is estimated to be worth $6.9 billion in that year. The survey identified over 350 franchise systems in New Zealand, (74% of them home-grown). It is estimated that there are 40,195 people employed within the franchise industry.

These figures show that franchising is an increasingly strong contributor to the New Zealand economy and they help to explain why so many small business people who own successful business operations are wondering about the possibilities of franchising what they have developed. This article is designed to help you decide whether franchising is a viable growth and expansion option for you and your business.

Franchising is not a quick road to riches, but it can be a successful and profitable path to future growth and prosperity provided you have the right elements in place and you thoroughly understand the industry and your obligations to franchisees. The purpose of this article is to outline your options, explain what's involved in franchising and show you where to get more help.

It's important that you also consult with an ANZ Business Specialist to tap into the knowledge and expertise that ANZ can offer in the field of franchising.

 

What is a franchise?

A franchise is an arrangement that allows another person (or company) to copy or replicate a successful business format. There are two parties to a franchise arrangement. The franchisor is the person or company that licenses the franchisee to replicate the business concept elsewhere. For example, Fastway Couriers is a successful franchise chain that originated in Napier and is now operates around New Zealand and offshore.

 

How do franchises arise?

Franchising offers successful business owners the option to grow their business without tying up all of their capital. The business must be able to be replicated elsewhere and have an identifiable brand. The business owner(s) set about systemising their business and creating operational manuals and guidelines so that a duplicate business can be operated by the franchisee.

 

What are the typical features of a franchise?

A typical franchise usually has these features:

  • A proven, successful operation.
  • A strong brand identity. For example, VIP Home Service NZ, Hire a Hubby, Mike Pero Mortgages and Robert Harris Café all enjoy strong market recognition in New Zealand.
  • A system that other people can operate. In other words, a business that is not dependent on the personality of the owner, although (as in the case of Mike Pero Mortgages and Rodney Wayne Hairdressing) the brand recognition may initially have been built around the 'charisma' of the founder.
  • The agreement involves replicating the system in its entirety (layout, colour schemes, brands and signage) rather than just a product or service.

 

How else could you expand or grow?

There are a range of distribution arrangements and channels you can consider for your product or service. All offer varying degrees of control and support for you as the business owner.


Licensing agreement

If you manufacture a suitable product or service, you could choose instead to have it manufactured or sold in markets you can't reach through licensing a local manufacturer or service business. For example, Levi jeans (and many other clothing labels) are manufactured in New Zealand under license from the parent company. The valuable part of the license is the brand itself, but the licensing agreement might also include manufacturing and marketing know-how. The licensee would pay you an agreed royalty or percentage of sales for the right to produce and sell the article.


Agency

Another option is to offer an agency to other businesses for your products or services. For example, a manufacturer of brake linings in Auckland may appoint agents throughout New Zealand to sell the brake linings. In many cases agents carry other lines as well. Agents may be exclusive or non-exclusive and they may or may not (as with licensees) have to meet agreed revenue targets to retain their agency rights. Agents typically get trade discounts from the product or service originator and then add their margin to create a sale price.


Distribution agreement

A further option is a distribution agreement. This is usually wider in scope than an agency agreement. For instance a manufacturing company might realise its strength lies in manufacturing a product rather than distributing it. The company might therefore seek to appoint a distributor (either local or international) who would undertake all aspects of the marketing and distribution of their products within a certain market.


Co-operative

A less common form of distribution structure is the co-operative. It is popular in certain industries (for instance the retail sector - Mitre 10 and Retravision are examples) where it allows groups of similar independent retailers to band together under the same banner for purchasing power. It is interesting that some franchises are co-operatives. For example, Paper Plus and The Kitchen Studio are co-operative franchises owned collectively by the franchisees rather than by a separate franchisor. So the co-operative model could be the succession end-point for a franchise system. For example, a businessperson could establish a chain of successful franchises and then sell out collectively to the franchisees, who could then form a co-operative to run the franchise chain.

 

Why franchise?

Why would you choose to expand rather than franchise through these other methods? It's basically a choice. You could open branches yourself and retain total control of your business expansion. However often it not a viable choice for many businesses because they lack the necessary financial and other resources to set up branches in the time frame required.


Advantages of franchising

  • You can expand using other people's capital, whereas opening another branch or business would require you to raise capital.
  • People who buy a franchise are likely to work harder at making a success of it than an employee in a branch office. As they have had to invest his or her own money.
  • It allows you to grow your brand and image in the marketplace while controlling quality and service standards through the franchise system imposed on franchisees.
  • It generates capital and revenue streams in the form of franchise fees and royalty payments.
  • It reduces costs by allowing you to develop economies of scale in purchasing, advertising and management.


Disadvantages of franchising

  • Preparing your business for franchising takes more time, energy and expense than most people anticipate.
  • You have to document all business systems, processes and quality standards in clear operations manuals that cover every possible contingency.
  • If you select the wrong franchisees they can cause serious harm to your business reputation, to your brand and to other franchisees.
  • You may find it hard to get rid of unsatisfactory franchisees, and you may get involved in time and energy wasting trouble shooting and disputes.
  • You may find controlling quality and consistency difficult, particularly if your franchises are widespread.
  • You can become so involved in setting up and maintaining the franchise system that your own business suffers or declines.
  • The franchise won't run itself; you have to provide basic training and on-going support for the franchisees.

It is easy to overestimate the returns from franchising. For example, it's a mistake to think that all the franchise fees will be 'cream'. You will have to spend some of this money on training and support for the franchisees, as well as on travel costs to supervise them.

 

Resources

Magazine

Visit your booksellers for the latest copy of the Franchise New Zealand magazine or visit its website www.franchise.co.nz for many useful articles and tips on franchising.


Franchise Association and book

The Franchise Association of New Zealand (FANZ) (call 09 523 4452 or visit www.franchiseassociation.org.nz) offers a helpful publication, The New Zealand Franchisor's Guide, with a more comprehensive account of the advantages and disadvantages of franchising. You could also ask to be put in touch with someone who has franchised their own business and who might be able to give you some valuable tips and guidance.

Joining FANZ also entitles you to some free initial consulting on legal, accounting, coaching and consultancy topics.

To talk to ANZ's franchising specialists call 0800 394 041.

Other useful ANZ Biz Hub articles include:

 

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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