Employees or Franchisees?

Franchising isn’t just for big businesses, suggests Tereza Murray. It can be a viable alternative to the hassle of employing staff – and if you want to be self-employed, a small franchise can offer some real benefits

Are you looking to expand your small business? If so, you might be dreading the thought of employing people and having to deal with staffing issues, no-shows, discipline, compliance, PAYE, KiwiSaver and all the other minutiae that come with being a boss – not to mention the horrors of New Zealand’s complex Holidays Act. Big companies cope by having specialist departments for HR, payroll and all the other functions, but small-medium businesses have to do it all themselves.

Is there a better way? Well yes, there can be. While many people think of franchising as something that only big companies do, it can be applied on a smaller scale, too. Because each franchised business is locally-owned and operated, with the franchisee in charge and on the spot, franchises enjoy a much flatter management structure than big companies.

Franchisees bring their own capital to the business, too. That’s why, in recent years, it has emerged as a more practical and sustainable growth model for many smaller businesses than the traditional approach of opening and staffing new locations, or adding more service vehicles.

Hire employees or appoint franchisees?

There’s another reason to consider franchising as an alternative to employing more staff. As we’ve seen in recent years, good employees have been difficult to recruit and even harder to retain, especially in the trades and service businesses where many positions demand industry qualifications and/or skilled labour.

The demand for skilled workers has risen, intensifying the competition and raising the cost of recruiting and retaining competent employees. Employees now wield more influence in negotiations relating to remuneration, benefits, and flexible work arrangements. And employees can leave at short notice, giving owners the headache of re-hiring and re-training new people. That costs money, time and focus that most small business owners just don’t have. Consequently, franchising has emerged as a solution to tackle many of these obstacles.

If you franchise your business, then yes – it will take longer to set up and take more time to find the right franchisees and train them, but once they are in, they’re committed. They have invested in the brand, in the system and the business, and they have the determination and commitment to make it work for them. They will work harder, appreciate the value of their customers, and – if you’ve chosen them well and trained them well – consistently maintain a higher standard of work.

It’s worth noting that franchisees are also much more likely to stay with the business for a long time than employees. Surveys suggest that the average tenure of a franchisee in New Zealand is eight years. Imagine how much knowledge and experience they have – and have to share with other newcomers.

Start a business or buy a franchise?

Let’s look at it from the other side for a moment. Why would somebody want to buy a franchise, rather than just get a job?

Well, for many Kiwis, the idea of self-employment is appealing. No boss to report to, flexible working hours, live and work where you want, and keep what you earn rather than being limited by your hourly rate. If you do well in your own business, you might even be able to sell it for a nice tax-free capital gain when the time is right.

But – and this is a big ‘but’ – the inherent risks and high failure rates associated with self-employed start-ups put a lot of people off. Many tradespeople, for example, venture into self-employment with high hopes but often return to contracting within six months due to struggles with marketing, cash flow, management systems and admin, and competition. Even if they do survive and build a good business, they are likely to find when they come to sell that it’s not worth much. After all, the value of the business is in their labour, not in their name.

And that’s why buying a franchise makes sense. Someone else has created the systems already. Someone has created a brand which attracts customers. Someone is there to coach you and mentor you as you get to grips with managing your own business. And, in the end, your business will be saleable precisely because it isn’t reliant on your labour – it’s reliant on the customer base you have built.

That’s why many bored, underpaid and dissatisfied employees are exploring franchise opportunities that offer a successful and rewarding career alternative. Home-based franchises have enjoyed a particular surge in popularity as they offer a better lifestyle, lower operating costs, and are seen as more ‘family-friendly’.

Post-Covid, many people are also choosing to depart the larger cities in favour of towns and regions with lower population density and less traffic. This migration is expected to boost the demand for franchises in the regions, offering a whole new set of opportunities for new franchises to become established.

Closer relationships

While well-established franchise brands are attractive to many, especially in the higher investment levels, emerging and growing franchise systems can offer some unique benefits and opportunities – for example, more available territories, and a choice of new markets and industries with less competition. Additionally, these brands often bring fresh, innovative concepts, allowing franchisees to differentiate themselves, service niche markets or appeal to a more diverse customer base.

Through working extensively with smaller businesses, we’ve observed that many prospective franchisees aren’t prioritising a well-established brand in their decision-making process. Often, they are more compelled by the type of relationship they can have with the franchisor, and the franchisor’s enthusiasm and commitment to their overall business.

In my opinion, as a franchise grows, there’s a risk that a ‘franchise business’ becomes a business that sells franchises rather than a business that grooms dogs or mows lawns, provides handyman services, sells good coffee or builds homes. That’s not true of every large franchise, of course, many of which have excellent leadership and engagement with their franchisees. But it does explain why a smaller franchise, where the franchisor is involved and has a personal relationship with the franchisees, product and customers, can be more attractive to some buyers.

It’s also worth noting that smaller networks often foster stronger partnerships with franchisees through a willingness to collaborate on key strategies and policies. This is not always the case in a ‘big company’ franchise, where consultation needs to be formalised and filtered through the right channels, sometimes creating discontent.

Where franchisees have more direct access to the franchisor, this can make for a more meaningful journey into self-employment where real professional growth is achieved rather than just following systems, and the franchisor benefits from a motivated, engaged and pro-active community representing their brand.

Small business franchising

It’s because of all these factors that small business franchising has become increasingly popular. Most business owners we speak to don’t have grand plans for world domination at a Subway level – many simply want the ability to meet existing demand or fulfil service agreements in other locations without the headache of managing remote teams.

By partnering with individuals who have a financial and personal interest in succeeding, the franchisor has more capacity to concentrate on performance and innovation. For such people, the definition of success is subjective: for some, it’s 2-3 franchised locations in addition to their main operation that require very little input on a day-to-day basis; for others, it’s about becoming a market leader and eventually transitioning away from direct delivery of the product or service and operating wholly through a franchise network.

It’s not a get-rich-quick scheme

Business owners considering expansion through franchising need to be aware that franchisees are not glorified employees. At the same time, franchisees are not fully independent; they rely on the franchisors for training, support, leadership and guidance. That’s why both need to approach the relationship as they would any healthy partnership. Mutual respect, honesty and a collaborative approach are important traits for a franchisor who wishes to establish a franchise with long-term prospects.

Equally, franchising is not a get-rich-quick scheme but should be approached as a long term strategy. Entry costs should be kept as low as possible, bearing in mind that franchisees shoulder the costs of establishing a new location. A franchisor’s main objective should be to help them set up and become operational and, above all, profitable as quickly as possible.

Advice for buyers

Anyone looking at buying opportunities with emerging franchisors should conduct the usual due diligence with help from franchisespecialist advisors (see page 68 of this magazine). In addition, I’d suggest they spend time with the franchisor in person to understand their vision for the brand, and their approach to the relationship.

The franchisor’s own business journey will be a big indicator, also. As creators of the business, what has been the biggest driver behind their success, and what have been the biggest lessons learnt along the way? How can they transfer this knowledge and experience to you? After all, that’s what you’ll be investing in when you choose to buy a franchise rather than just take a job.

About the Author

Tereza Murray is principal of Tereza Murray Franchising, a New Zealand-founded franchise consultancy that now operates on both sides of the Tasman.