What is franchising and is it for me? print Print

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There are lots of definitions of franchising, but its principles are very simple. Franchising is an agreement that allows one party (the franchisee) to do business under a brand name and according to a given pattern of business that has been developed by another party (the franchisor).

Franchisors and franchisees

A franchisor develops a 'business format' - an operating system and a brand for selling a particular product or service. The business format is in essence a 'blueprint' for operating the business.

A franchisee is an individual who pays an initial fee and ongoing royalties to the franchisor, to use the business format to operate their own business.

 

Different types of franchise arrangements

The term franchising can be used to describe a range of business structures including dealerships, co-operatives and agencies. Most common however is the business format franchise in which an entire system for conducting business is replicated.

Within the business format model, there are a number of variations that you should be aware of:

  • Unit franchising - This is the most common type of franchising, under which a national franchisor grants a franchisee the right to operate one outlet or in one territory. Well-known examples of unit franchises include Muffin Break and McDonald's

    A variation of unit franchising is multiple unit franchising, under which a franchisee may operate more than one outlet or operate in more than one territory.
  • Combination franchising - This is essentially the marketing of several franchised products or services in the same location. Well-known examples of combination franchising include Subway stores within StarMart outlets and Lotto shops within PaperPlus stores
  • In-store franchising - This usually refers to the practice of a department store leasing space or granting a concession of space to a franchise system which will establish franchise outlets in that space. An example of in-store franchising is the BB's Espresso outlets within Freedom Furniture stores
  • Conversion franchising - This is the practice of recruiting independent small business proprietors from within the same industry into a franchise system. Examples of conversion franchising include an independent hairdressing business joining Rodney Wayne
  • Master franchising - In master franchising, a national franchisor grants another person (the master franchisee) the right to sub-franchise the system to other franchisees, usually in a defined territory, region or country. This is a common system for developing franchise systems internationally and for franchises that have a large number of individual franchisees, such as Fastway Couriers and Green Acres
  • Turnkey franchising - Turnkey franchising is a form of business format franchising whereby the franchisor provides the franchisee with fully fitted-out, leased or sub-leased premises as part of the franchise package instead of simply providing specifications to the franchisee to fit out their own store. Most retail franchise businesses are developed this way.

 

Franchise fees

A franchisor typically makes their money through franchise fees paid by the franchisee. There can be a number of different fees charged and it is important to understand what each is:

  • Initial fee - this fee covers initial training, precommencement assistance and the franchise 'right'    
  • Set-up costs - these are not fees as such, but are the establishment costs of the business and cover things such as shop fit-out, stock, signage, plant and machinery and other such items
  • Royalties - the majority of a franchisor's ongoing income is derived from royalties or management service fees. These are typically calculated as a percentage of the franchisee's turnover
  • Marketing or advertising fees - these fees cover such things as advertising, public relations, product development, market research, brochure development and merchandising. Marketing is done at a local, regional or national level and often a franchisee committee will have a say in how this money is spent
  • Insurance - it pays to find out exactly what is and isn't included in the cover that may be available through the franchisor. It may not include everything you'll need in place to ensure you and your business survive the unexpected
  • Other ongoing fees - there may be ongoing fees for such things as training, conferences, accounting services and software programs that the franchisee is obliged to pay for. These can vary from franchise to franchise and it is important to understand all of the ongoing fees before entering into a Franchise Agreement.

 

Some advantages of franchising

  • Brand recognition - the name and reputation of the company are already established and customers are generally more comfortable purchasing from you because they know what they are going to get. A recognised brand name can also be beneficial with negotiating leases, hiring staff and establishing a relationship with suppliers
  • Co-ordinated marketing activity - by being part of a network of franchisees, the business can be advertised more widely and more often
  • Training - a franchisee can get into the business without necessarily having a strong background in the particular industry
  • Ongoing franchisor support - most franchisors provide ongoing support, which may include operating manuals, site selection, recruiting and managing staff, access to market information, selection of plant and equipment and a variety of other activities
  • Network of peers - as part of a franchise group, you can share ideas with other franchisees and also learn from each other's mistakes
  • Lower set-up costs - because the franchisor has a proven system for establishing new franchises, they may be able to advise on the most efficient use of investment funds in terms of premises, fit-out, purchasing of machinery and stock and other items
  • Bulk purchasing - usually the size of a franchise group means that you can have access to supplies at discounted rates
  • Financing - lenders are sometimes prepared to lend more to franchised businesses because of the strength and reputation of the business.

 

Some issues to be aware of

  • When you buy into a franchise system, you are buying the right to use the business format for a specified period of time (the term of the Agreement). If everything is going well, the franchisor will usually extend the Agreement when that period expires, but that is not guaranteed
  • There may be limitations on what you can and cannot do in a franchise, ranging from advertising and pricing to whom you can sell your business to
  • Just as you can benefit from the strength of a good brand, you can also suffer if the brand loses its appeal to customers. This may come about from poor performance by the franchisor or by other franchisees in the system
  • You still face many of the risks of other small businesses - a competitor opening up next door, a debtor failing to pay you etc. Being part of a franchise can reduce some of your risks, but does not eliminate them.

 

Is franchising for you?

Unlike an independent business, a good franchise offers tried and tested methods and systems for operating and managing the business, ongoing support and training and a strong existing brand to leverage off.

In some ways, a franchise is like a lease in that you buy the right to use the system for a set number of years. After that period your right to continue in the business ceases, unless there is a right of renewal.

Most reputable franchises operate under a set of very specific rules, which you must fully understand and be comfortable with before signing a Franchise Agreement.

As will be made clear throughout this Guide, you need to approach the decision to enter a franchise carefully and ensure that you take expert advice.

Ultimately, only you can decide whether franchising is right for you and a lot will depend on the type of franchise business you decide to pursue. Here are some views on what it takes to be a successful franchisee…


What the franchisors say:

"I have to be convinced that the people we take on as franchisees are passionate, hard-working and energetic - people who convey the values of the Burger Fuel brand. We're not interested in people who just want to buy themselves a job."
Chris Mason, Franchisor, Burger Fuel


What the franchisees say:

"This business is built on the strength of having good people. You've got to be able to get good staff and keep good staff. It sounds simple, but if you've never managed a team of people before, it takes a lot of getting used to."
Rod Clarke, Franchisee, Hardy's Healthy Living

"This is a seven-day-a-week operation and we stay open quite late at night. You can't do it all alone so you've got to have the support of your family to make a franchise work."
Andrew Hares, Franchisee, Video Ezy


What the banks say:

"We see hundreds of different franchises and there is no ideal in terms of structure or design. What most successful franchise systems do have in common, however, is a strong ongoing relationship between franchisee and franchisor. Co-operation, commitment and communication are the real building blocks of success in franchising. These largely come, not from legal agreements, but from ethical dealings, strong leadership and mutual respect of each party for the goals of the other."
Sean Dwyer, National Franchise Manager, ANZ

 

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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