Tips on buying a franchise print Print

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Franchises are becoming increasingly popular for people wishing to go into business. This brief introduction is intended to alert you to the advantages as well as the pitfalls of buying a franchise.

Franchises have a good success rate

Statistics show that franchises have a much lower failure rate than new business start-ups. This helps explain why franchising is becoming an increasingly popular option for people wanting or needing to go into business for themselves. However, it's a mistake to think that all franchises are a good bet. Like all businesses there are no guarantees of success and some franchises have not delivered what they promised or the financial returns. As with any other kind of business opportunity, you should do your homework thoroughly before you buy a franchise.

 

Are you right for franchise ownership?

Clarify this basic question before you consider franchise opportunities. Good franchises work well because they are developed business models. This means that the whole business has been thought out and systematised. When you buy the franchise you will be trained to implement a proven system. This will suit some, but not all.

 

Unsuitable business types

Franchises are not suitable for strongly entrepreneurial business types who enjoy the act of creating a business from scratch. If you have lots of initiative and ideas and enjoy 'doing your own thing' rather than being told what to do, then you will likely chafe under the typical restrictions of a franchise agreement. Franchisors (the person or company selling the franchise) have developed a system that works and they will want franchisees (the people buying a franchise) to work within the system. They have developed a plan that works and they want you to work that plan. "Don't fiddle with the knobs" and "Follow our guidelines because we know what works" are the underlying instructions. The whole aim of franchising is to duplicate the original, so that customers get the same standard and quality of product or service from any outlet. There are therefore fewer opportunities for initiatives, or for departing from the established model. For instance, areas such as marketing and promotion might be handled by the franchisor on behalf of the whole franchise group.

 

Suitable business personalities

Franchise businesses are very suitable for people who have some business experience, but have never owned their own business. For example, people who have been employed in other businesses and have gained some business and administrative skills over the years often do well in franchises. Franchise opportunities can be split into 'buying a job' and 'buying a business'. The first option provides you an income, generally has a lower entry cost, and opportunity to grow the business is limited. The second option usually costs more but you have greater flexibility and capacity to grow the business.

In both cases a good franchise will provide considerable guidance and support for the franchisee. One advantage of buying a franchise is that you don't necessarily need experience in that particular industry, as a good franchise system will provide you with the necessary training and support.

Compare this to starting a business, where lack of specific experience in an industry often proves a severe handicap.

 

Qualities you must have

It's a mistake to think that owning a franchise is a soft option. It's not, nor is it quite like working for a business or in a corporate office. You may start with the advantage of knowing that your franchise is based on a proven business idea, but you still have to make your particular franchise work in your area. You should receive some training, but not all your problems will be solved for you. If you're not prepared to put in the hard yards, particularly in the first years, your business could fail or the franchise could be taken away from you by the franchisor. You therefore need the same drive and persistence and a willingness to overcome challenges that anyone starting a small business requires. In addition, some basic business skills will greatly increase your chances of success. If you don't have such skills, think seriously about acquiring them before you purchase a franchise.

 

Tips for surviving franchise disasters

What to watch for

Franchising or licensing over the years has had its share of operators looking to make a quick dollar from naïve franchise buyers. Things to look for are very persuasive salespeople who pressure you to sign, settle or pay a deposit now, or state you may lose the territory. One clear danger signal is that such people often require a substantial upfront fee from you. Doing your homework thoroughly will help you avoid such schemes. Always get a good franchise lawyer and accountant to check out the deal before you sign up. Also check the track records of people offering you a franchise and ask to speak to existing franchise owners about their experiences with the franchisor.

 

Avoid honest but incompetent franchisors

As franchising becomes more popular business people are looking to use franchising to expand their existing business into a chain of franchises. For a variety of reasons not all are successful. Often the profitable business is based around the charisma and drive of the original owner, and this key component cannot easily be replicated in franchisees. Or the owner chooses the wrong franchisees, accepting anyone who can raise the franchise fee. (Choosing suitable franchisees is a skill in itself). Most business owners wishing to franchise also greatly underestimate the time and effort needed to systemise their businesses in order to franchise the concept, as well as the level of on-going support and training they will need to give franchisees. It is not unusual for the originally profitable business to decline because the owner has to devote so much time to the problems faced by the franchisees. As a result both the franchisor and franchisee business can suffer, so it pays to check thoroughly the franchisor's capacity to support you.

 

Avoid unproven franchise schemes

There is a natural human wish to 'be in on the ground floor', because this is where the big money is supposedly made. But it is all too often also where the big money is lost. In general, avoid franchise schemes that do not have a solid track record. The whole point of buying a franchise rather than starting your own business is to reduce your risk of failure. Buying into an unproven franchise scheme eliminates this whole advantage. Avoid succumbing to pressures to take up a franchise opportunity 'before all the good territories are gone.' It is better to choose a proven franchise opportunity or at the very least one with a well tested pilot operation or one with existing successful franchisees.

 

A franchise checklist 

Here are some questions to consider:


Will you enjoy this work?

Many have made the transition from working for a large business or corporate to owning a muffin franchise, a bookshop franchise, a sports goods franchise or a paint and panel franchise. But will you enjoy this kind of work? It's hard to make a real success of products or services you don't really like.


What exactly are you buying?

Have the franchise concept and contract checked carefully by a lawyer, accountant or advisor who specialises in, or has extensive experience of, the franchise industry. An expert will know the important issues to consider, such as:

  • What territory or coverage are you being offered?
  • Does the agreement include a 'cooling off' period (say 14 days) in case you change your mind about the franchise?
  • Do you have exclusive rights for that territory, or could you find a competitor opening down the road next year?
  • Do you have 'first option' rights to set up more franchises in your area if the business goes well? (Many people become wealthy by owning multiple franchises).
  • Will you get help with setting up a database of customers or clients? This could happen in various ways. For example:
  • Through national advertising that provides the franchisor with a database of prospective customers who could be passed on to the franchisee.
  • Existing franchisees in the area might have more customers than they can cope with and be willing to pass some of these on (some form of commission for these sales leads is often applicable).
  • What are the restrictions? Do you have to meet certain sales figures to retain the franchise?
  • Under what circumstances can the franchise be taken off you?
  • Is there a real market demand for the franchise in the area you have in mind? Has this demand been properly researched?
  • How realistic are the profit projections for the franchise you want to buy? Ask the franchisor for the hard facts and market research to support any revenue or profit projections. Also get outside advice from an accountant and/or existing franchise owners on this issue.
  • What upfront fee will you have to pay? What exactly do you get for this fee in the way of training?
  • What on-going fees or royalties will you have to pay the franchisor? What do these cover (for example, joint marketing, promotions or advertising costs)?
  • What kind of on-going support are you likely to get? Do the franchisees meet regularly?
  • Do you have to buy all your products or services through the franchisor or can you source them on the open market? What are the pricing and quality policies?
  • Can you sell the franchise at a later date? What qualifications must a buyer have? Must you give the franchisor first option?

 

Have you spoken to other franchisees?

You can learn a great deal about a franchise by speaking to existing franchisees. For example:

  • Is the relationship between the franchisor and franchisees co-operative or confrontational?
  • How well does the franchisor support the franchisees in terms of on-going support, marketing initiatives, efficient central administration and group buying, etc.?
  • Has the franchise lived up to the expectations of the franchisee in terms of sales revenue, etc.?
  • Is there a franchise owners' board or council with input into the franchisor's decisions?

Endeavour to speak with both successful and underperforming or ex-franchisees to get a well rounded and accurate picture of the franchise and franchisor performance. Often the list of franchisees provided by a franchisor represent the most successful franchisees in the system.

If possible ask if you can work in a franchise for a month or two to give you some idea of how the franchise operates and whether the work will suit you.

 

How stable is the franchisor?

How long has the franchisor (company or individual) been in business? Competent operators should offer a disclosure document giving background information on the nature, financial health and general viability of the franchisor.

Does the franchisor have the resources and commitment to develop the whole franchise chain and are there initiatives in progress?

Note: it is not unknown for a successful franchise development to be taken over by a larger corporation or conglomerate and then allowed to languish, or at least not driven with the same passion and enthusiasm as the franchise creator. Could this happen to the franchise chain you're interested in?

 

Is the franchise in a growth industry?

Identify the business life cycle of the franchise. Is the business located in an emerging, maturing or declining industry? This is important factor if your franchise fee is based on the future profits of your franchise. The position in the life cycle will also give you an indication of whether to expect new competition to enter your market. An emerging industry is likely to have more potential, but also sure to have many people banging on the door.

 

Help and resources

An ANZ Business Specialist can put you in contact with the Bank's Franchise Specialists who can talk through your franchise opportunity in more detail. Or call 0800 394 041.


Get expert help

The ANZ Franchise team can recommend to you franchise consultants, accountants and lawyers with experience in franchising. Or use the list published in the New Zealand Franchise Magazine. Before you sign any agreement or contract, get such an expert to review the terms for you.


Magazine

Visit your stationers for the latest copy of the Franchise New Zealand magazine or visit their website www.franchise.co.nz


Franchise association and book

Contact the Franchise Association of New Zealand (call 09 523 4452 or visit www.franchiseassociation.org.nz) and ask how they can help you to find a suitable franchise and expert advisor. Their publication, The New Zealand Franchisees' Guide, offers you a more comprehensive account of the advantages and disadvantages of franchising.


Trade show

To see what's on offer and meet people in the industry, try to attend at least one franchise trade show before you select a franchise to see what is on offer. There is usually at least one franchise trade show a year in various centres around New Zealand. These shows will be advertised in newspapers or in specialist franchise magazines and publications, or you can contact the Franchise Association of New Zealand for more information.

   

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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