Franchising 101

We answer 5 common questions about franchising

New Zealand is the most franchised country in the world. According to the 2021 Franchising New Zealand survey, there are 32,357 franchised units around the country – and the turnover of the franchise sector is equivalent to a massive 12 percent of our GDP. So just what is franchising, why does it work and is it for you?

1. What is franchising?

Franchising is a method of marketing and distribution whereby a company (called the franchisor) expands by granting a person or company (called the franchisee) the right to operate a copy of its business. The right will usually include the ability to use the name, the business system and the know-how of the franchisor, and is granted for a fixed term.

The franchisor usually gains his or her income from fees or product mark-ups paid by the franchisee. In return, he or she must provide a variety of services to encourage the continuing profitability and growth of the franchisee’s business. The franchisee pays to set up the business in their area (including, for example, property, leasing or equipment costs) and is the owner of their own business. They receive their income from successfully marketing a desirable product or service under a promotable brand name.

2. Is franchising reputable?

Franchising enables companies who have a good product or service to expand faster because they are using the capital, local knowledge and commitment of individuals who are in business for themselves. It gives those individuals the ability to go into business properly trained and equipped, with the security of a well-proven product and system behind them.

Franchising is a part of daily life in New Zealand. Many of our best-known brands are actually franchises: Lotto, Columbus Coffee, FreshChoice, Rodney Wayne and, of course, McDonald’s.

3. Why buy a franchise?

When you buy a well-developed franchise, you should enjoy many advantages. These include,

Product or service: The franchisor has already proved that the market exists. Franchisees are not risking their money on a new idea.

System: The most efficient way of delivering the product or service has been developed and will be shared with the franchisee.

Equipment: Franchisees start with the best equipment for the job and only the equipment they need – often specially-designed or developed.

Suppliers: Bulk buying means franchisees benefit from lower prices and better service than independents.

Brand marketing: The company already has a name which attracts customers and makes marketing more effective.

Training: A franchisee can enter a brand new industry and be trained in how to run that specific business to best effect.

Support: The franchisor keeps a watchful eye on the progress of the business to help the franchisee grow at the right speed and avoid errors.

Research & development: While the franchisee focuses on customer service, the franchisor works on new products and techniques to ensure franchisees remain competitive.

4. Is it a fail-safe way to go into business?

No. Franchises may offer you a much greater chance of success than trying to go it alone, but no business venture is entirely without risk.

Franchises are not the same, any more than all shops are the same. Even within the same industry, each franchise will be set up differently. It will have different business systems, different cost structures, different support services for franchisees and, above all, different people – both as franchisors and franchisees.

If the franchise is properly structured, it is likely to be the individuals who make the difference. Common causes for franchisee failure include:

• Choosing a business for which they are not suited or equipped.

• Being under-capitalised from the start and unable to finance the growth of the business.

• Failing to take adequate legal and financial advice prior to purchase.

• Not following the franchise system.

• Taking too much money out of the business too soon.

• Being over-reliant on the franchisor rather than accepting that this is your business.

• Failure to act upon advice or make difficult decisions.

Franchisors can also make mistakes. The most serious ones which inexperienced franchisors make are:

• Being under-capitalised and unable to provide the necessary support.

• Not having properly developed and tested the systems.

• Not having a sustainable business structure which can provide a fair return for both franchisor and franchisee.

• Selecting the wrong location.

• Selecting the wrong franchisee.

That’s why, if you’re looking at buying a franchise, you need to choose carefully and take professional advice from a lawyer and an accountant who specialise in franchising (see page 72). They may charge a little more than a non-specialist, but they’ll take less time, probably have experience of the franchise you are looking at, know what to look for and give better advice.

5. Is it for me?

Franchising does not suit everyone. It does involve taking a risk, not having the security of a regular income, and being responsible for your own business. Do not rely upon the franchisor to make you successful. The franchisor will help, but basically franchisees are given the tools –the product, the system, the brand and the training – to enable them to get on with the job.

Success is up to the individual. As every successful franchisee will tell you: you only get out of the business what you put into the business. Remember that golden rule and you could have a great future as a franchisee.