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Franchising your business - the options print Print

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This guide on franchising looks at the suitability of your business for franchising, what franchisees might reasonably expect from you and your options for franchise structures.

Can I franchise my business?

In theory, any successful business can be franchised if the owner is prepared to do the work and understand the obligations of being a franchisor. Here's a checklist for a franchisable business. It includes many of the features a potential franchisee will be looking for. How many of these features apply to your business?

  • You have a proven, successful and consistently profitable business that has been in operation for at least three years so it has an established track record that you can show to potential franchisees.
  • Your business is not dependent upon your own personality or unique skill set for its survival. Anyone could run it because it's based on simple, proven systems of management and marketing.
  • Your business has strongly developed and identifiable core values as well as a clear structure and purpose.
  • You have a clear vision for the future direction and destination of the business that you can communicate to potential franchisees to build commitment and motivation.
  • You have developed a strong brand identity and credibility in the marketplace: a distinct 'business personality' (this includes such things as distinctive business layout and signage). For example, anyone can imitate or start a lawn mowing operation or a bookshop and stationery outlet, but they cannot directly copy well-known franchise brand formats or benefit from the marketplace recognition and credibility of these established brands.
  • You have discussed your franchising plans with an experienced franchise consultant as well as a lawyer, accountant and bank that specialise in franchising.
  • You have secured protection of your brands and logos and other intellectual property so that others cannot copy or infringe upon your brands or challenge your ideas (for example, copy the unique features of your products or services that are at the core of your business).
  • You have established a second, pilot branch of your business to test that the business systems are transferable and that another person (a manager or business partner) can run this pilot operation successfully and without day-to-day supervision for a minimum period of six months.
  • Through this second pilot business you have been able to analyse, refine and streamline your business systems to produce an Operations Manual that shows a potential franchisee in simple, logical steps how to run the business. Many successful franchise systems contract a franchise consultant to assist with this step.
  • You have developed a training manual and programme to train franchisees and have budgeted for the time and expense that this training is likely to cost as well as for on-going support and 'hand-holding' while the franchisee gets established.
  • You have thought about and developed a profile of a suitable franchisee who has the skills, experience and personality to successfully run a franchise. This doesn't mean 'anyone with the necessary cash' because each franchisee will be an ambassador for your business and must contribute to the success of your whole team of franchisees.
  • You have a detailed marketing plan for the launch and ongoing development of the brand in the designated marketplaces, along with the required financial capability to fund the plan.

If you can tick all these steps as accomplished then you're well on the way to creating a successful franchise. In addition these two further steps are important:

  • You have thoroughly studied the franchise industry over a period of time (preferable at least a year); you have joined the Franchise Association of New Zealand (see Resources at the end) and attended some of their conferences and trade shows. You have talked to franchisors and learned about the challenges and rewards of franchising.
  • Through these contacts you have selected a panel of advisors (including an experienced franchise consultant in addition to a lawyer, accountant and bank who specialise in franchising) This point is more fully developed in our article Franchising your business - the legal issues.
     

What are the franchising options?

As the list shows, preparing your business for franchising requires a good deal of hard work. It is not the get rich quick process that many imagine. The next step is to evaluate the franchising options available to you. These include:


Direct franchises

The most common form of franchising is selling franchise rights direct to potential franchisees. This allows for greater control over the franchising process than other options, but it also means more 'hands on' work. You will need to budget for the whole franchising programme as it can be very time consuming. For example, if you want to allocate territories in a city or area you are unfamiliar with, you must be prepared to do some local fieldwork or put up with disputes between franchisees arguing over territory boundaries and what is a sustainable territory for a franchise. In the meantime, while you are travelling round the country, who is running your business? (This whole question of territories is considered in more detail in our article Franchising your business - the legal issues.)


Master franchise agreement

Under this arrangement you sell a master franchise agreement to a person or company. They gain the rights to sell franchises within their master franchise area. For example, if you are located in the North Island, you might decide the most practical way to market your franchising concept in the South Island is to sell a master franchise for the whole of the South Island (or perhaps to a major South Island city like Christchurch or Dunedin) to a person or business with the skills and resources to undertake the development of sub-franchises. This arrangement could work well for businesses with limited financial resources who wish to expand rapidly but lack local knowledge, money and possibly the marketing skills to develop territories. For example, many New Zealanders have done very well for themselves by securing New Zealand master franchise rights for overseas franchises. In a similar way, the master franchise system might be the best option for overseas expansion. For example it may not be practical for you to directly administer franchises in Australia. The downside is that there may now be two levels of royalties. A franchisee might have to pay a royalty fee to the master franchise owner, who in turn pays a royalty fee to you.

Some types of franchise businesses (for example in the food trade where margins can be very low) may not be able to support multiple royalty levels.


Partnership arrangement

A halfway step to selling a full franchise is to take in a partner for your first pilot franchise operation. For example, you might set up a separate company to manage this second outlet and sell a percentage shareholding in this company to an outside partner. This enables you to share the cost of the development and also gain someone with a financial interest in the venture to help you test the practicalities of the franchise format.


Turn-key lease to buy

Another option is to fit out a complete franchise outlet and then lease it to a potential franchisee as a 'turn-key' operation with the option to buy the franchise. The lease arrangement can be a win/win for both parties. You get to assess the business skills and suitability of the lessee and the potential franchisee can try out the franchise before they actually buy. The downside of this arrangement is that you have to finance the set up and few small businesses have the resources to do this. Those that do, however, often treat this as a revenue earner. In other words, they charge a premium for arranging the business fit-out, setting up the equipment, etc. This is necessary because the time and effort can be considerable. On the other hand, the outlet should end up looking and functioning exactly as you envisage it.

 

How do the financials work?

All these various structures will have differing impacts on your capital and income, so they need to be carefully evaluated with the help of franchising experts. Here are some commonly asked questions:


"Can I charge $100,000 as a franchise fee?"

This question is eagerly asked by many wishing to franchise their businesses. The answer is: can you prove that this (or any other figure) provides good value for the franchisee? You're not operating in a vacuum - potential franchisees in New Zealand can choose from hundreds of franchises. Why should they pick yours? You can study a sample of these listings in Franchise New Zealand magazine or view them online at www.franchise.org.nz, or through Franchise Business at www.franchisebusiness.co.nz.

The one-off franchise fee usually includes these components:

  • A goodwill component for purchasing a proven business concept.
  • Brand recognition, an established customer base, etc.
  • Training and support for the franchisee.
  • Provision for business fit-out, equipment and stock.

The value is therefore best determined with the help of a franchise consultant. The more benefits you can demonstrate to a potential franchisee the better.


"What income can I expect?"

Be prepared in the early years to invest rather than receive. Remember that when you start franchising you will be running two businesses: your original business plus the franchising business. Franchising is rarely, if ever, a get-rich-quick scheme - a well-structured concept takes time and money to set up. Rather, it is a medium to long-term method of expanding your business and building its value. It is not uncommon for the original business to subsidise the costs of the franchising scheme for some time, and it's important for the original business to be strong enough to do this.


"How is that income made up?"

The most typical sources of income from selling a franchise are:

  • A one-off fee for the franchise concept (for example, $50,000) that includes the components just discussed.
  • A royalty on sales (for example, 5%).
  • A fee for group services, such as franchise group promotions and marketing, admin services, etc. (at a rate of 3%, for example).

As every business is unique, there are no set scales for these income sources. For example, a 10% royalty might work for a service business where margins are high but turnover comparatively low, but be out of the question for a supermarket type business where margins are very tight but turnover is in the high six figures or millions. A franchise consultant is the best person to advise you on what you could charge for your particular franchising concept. It will also pay you to research the royalty figures for similar franchise businesses.


"How soon can I get an income?"

Again, there is no set answer to this question. It depends upon how organised you are, how quickly you can sell off franchises and what your break-even point is (the number of franchises you have to sell to recoup the costs of developing your business into a replicable product). Bear in mind you may have to take on extra staff to manage this second business. You'll need to work out the break-even point for your franchising concept in co-operation with a franchising expert and your accountant.


"Can I copy someone else's franchising plan?"

People often think this is a viable shortcut, but the results are very seldom, if ever, satisfactory. Each business is unique. You should certainly research other plans for successful core features, but the franchise plan for your business should be tailor made.

 

Finding franchising advisors

This guide has referred repeatedly to the need for advice. The single most valuable asset you can develop is a team of advisors who have successfully guided other businesses down the franchising route. This team of advisors should include and experienced franchise consultant and a lawyer, accountant and bank that specialise in franchising. Most experts stress the importance of getting your franchise structure right at the start, because it may be very hard to change it later. Use all your business resources and contacts to find suitable people. Also get to know people in the franchising industry to learn more about how it operates.

 

Resources

Magazine

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


Franchise association and book

The Franchise Association of New Zealand offers a helpful publication, The New Zealand Franchisor's Guide, with a more comprehensive account of the advantages and disadvantages of franchising. You can contact them on (09) 523 4452 or visit www.franchiseassociation.org.nz. 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.

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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