Helpful Franchise Information
What is a Franchise?
A simple explanation of a franchise is that it is a licence granted by the owner of a business (the franchisor) to allow other parties (franchisees) to operate a business selling products or services under the franchisor’s brand name and using the franchisor’s business and marketing systems.
The strengths of franchises tend to be that:
- They have an established brand identity and reputation in the market place.
- They have proven business systems.
- The franchisor will provide the franchisee with training on aspects of the brand and business systems.
- The franchisor often supplies all of the goods to be sold and therefore, can do so at advantageous prices by using bulk buying power.
- The franchisor will provide ongoing training assistance and national marketing.
Is a Franchise Right for You?
Before plunging into a franchise, it is important to consider whether this type of business arrangement is right for you. Firstly, although the franchise is granted by the franchisor, you will essentially be self-employed. Entering a franchise may mean a huge investment of your own time and money to get it off the ground.
The key to successful franchises is the ability of franchisees to adhere to the strict business model provided by the franchisor and to provide consumers with consistent delivery of products and service. There is not a lot of scope for franchisees to “do their own thing” in a franchise-style business, and franchise agreements normally make it very clear that it is crucial that a franchisee operates strictly in accordance with the systems.
The Franchise Agreement: What are you Paying for?
The franchise agreement sets out the legal obligations of the franchisor and the franchisee in relation to each other.
A common list of things to consider when reviewing a franchise agreement includes:
- What is being provided? Things that may be included are the right to use brand names, operation manuals, premises to operate, training and technical support.
- What is the term of the agreement? Are there any rights of renewal?
- Is your franchise limited to a defined territory? If so, is that territory exclusive or can other franchisees be permitted to operate in your territory?
- What fees are required to enter into the franchise and what are the ongoing fees? There may be start-up costs including the initial franchising fee, equipment fees, training fees, as well as ongoing payments, such as royalties. Royalties are often defined periodic amounts but may sometimes be based on a percentage of the business’ turnover.
- What are the rights of the parties to terminate? Can you sell the franchise and to whom? Some franchise agreements state that the franchisee must first offer to sell the franchise back to the franchisor. Additionally, some state that the value of the franchise will be the value of stock and plant with no component for goodwill built up by the franchisee.
- What provisions are there for the settlement of disputes?
Be Wary of New Franchise Systems
If a franchise system is new to the market, you have to assess the greater level of risk this might pose to you. Because there may be no financial or relevant historical information available to you and no proven track record in the market place, it is even more important that you research the franchise business and the franchisor thoroughly and seek professional advice from your lawyer and accountant.
Franchise Association of New Zealand
If the franchisor is a member of the Association (which is voluntary), the franchisor must adhere to the Association’s Code. This Code requires:
- The franchisor’s agreement to contain a “cooling down” period, which allows the prospective franchisee to back out of the agreement up to seven days after it has been signed if they get cold feet.
- The franchisor to provide the franchisee with a disclosure document. This document is a summary of the franchisor and their relevant business experience, financial information, the key terms of the franchise agreement and a breakdown of the franchise purchase price and associated costs.
- The franchisor’s agreement to contain specific, minimum dispute resolution procedures for resolving disputes with the franchisee.
- The franchisor to provide the Association with copies of its franchise agreement and disclosure document to ensure compliance with the Code.
In summary, when considering buying a franchise business:
- Consider whether a franchise model suits you.
- Do your research on the franchise and the franchisor, including talking to existing franchisees to get their opinion of the systems and the franchisor.
- Read carefully and ensure that you understand the franchise agreement.
- Get professional advice from your solicitor and accountant.
Article written by James Gilbertson, a Wellington lawyer with experience in franchising. Article published in M2M Magazine, July 2007