Tips on buying a franchise

Statistics show that franchises have a much lower failure rate than new business start-ups. That’s why franchising is a popular option for people wanting to go into business for themselves.  However, like all businesses there are no guarantees of success and not all franchises are a good bet. It’s essential to do your homework before you buy a franchise, and this article is designed to help.

Before you look at any franchise opportunities, step back and consider whether owning a franchise is right for you.

Owning a franchise might be suitable for you if you have some business experience, but have never owned your own business. People who have been employed in other businesses and have gained some business and administrative skills over the years often do well in franchises. 

Bear in mind that you don't necessarily need experience in a particular industry, as a good franchise system will provide you with the necessary training and support. However, you need to enjoy working in that industry or sector – it’s hard to make a real success of products or services you don’t really like or value.

You should also understand what kind of franchise you’re looking for. 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.

Owning a franchise might not be suitable for you if you are an entrepreneurial type who would enjoy creating a business from scratch. 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. 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.

If you have lots of initiative and ideas and enjoy 'doing your own thing' rather than being told what to do, you might find the typical restrictions of a franchise agreement too limiting.

When you buy a franchise you’ll get training and support, but you still need to make it work in your area. To succeed you’ll need:

• Drive and persistence.
• A well-developed work ethic.
• Resilience and a willingness to overcome challenges.
• The ability to follow a system and take advice.
• Good people and communication skills.
• Some basic business skills.

If you don’t have these skills and qualities, think carefully before buying a franchise.

The quality and capability of the franchisor has a huge role to play in the success of individual franchisees. So before you look in detail at a particular franchise opportunity, start by assessing the franchisor.

• What is their track record? How long have they been in business? Competent operators should offer a disclosure document giving background information on the nature, financial health and general viability of the franchisor.
• Do they have the resources and commitment to develop the whole franchise chain and are there initiatives in progress?
• What is the history of the franchise operation? It’s not unheard of 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?
• Beware franchisors who pressure you to sign, settle or pay a deposit now, threaten that you may lose the territory, or require a substantial upfront fee from you. These are all danger signs that you may be dealing with an unscrupulous franchisor.

Make sure you speak to other franchisees. What is their experience and opinion of the franchisor? In particular:

• 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?

• Does it have a proven track record? 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. The whole point of buying a franchise is to reduce your risk of failure. Buying into an unproven franchise scheme eliminates this whole advantage.
• 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?

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.

Where in the business life cycle is the franchise? Is the business located in an emerging, maturing or declining industry? This is an 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 competitors.

Always get a good franchise lawyer, accountant or adviser who specialises in the franchise industry to check out the deal before you sign.

We recognise that franchise businesses are different and therefore try to make obtaining finances for franchisees quicker and easier by understanding the strength of established, successful franchise systems. Our Business Specialists will work with you to help you to structure your business banking requirements to suit your current and future needs.

Download our free, easy to understand franchise guide - a great place to start if you're considering buying a franchise. 

The Franchise Association of New Zealand can help you find a suitable franchise and expert adviser.

Try to attend at least one franchise trade show to see what is on offer before you select a franchise. There is usually at least one franchise trade show a year in various centres around New Zealand - contact the Franchise Association of New Zealand for more information.