The beginners guide to setting up a franchise
So you think you have a business robust enough for franchising? Patricia Moore talks to the franchise experts to determine the potential pit-falls. And there’s a helpful case-study or two to inspire you.
|So you think you have a business robust enough for franchising? Patricia Moore talks to the franchise experts to determine the potential pit-falls. And there’s a helpful case-study or two to inspire you.
Think groceries, hardware, takeaways and business services; then think lawn mowing, bikini waxing, car care and coaching and you’re still just dipping your toes in the franchise pool. The New Zealand franchise industry may have its origins in the 1960s, but it’s still providing a rich mix of exciting opportunities for people to be their own boss.
Despite the negative impact of the recent global financial crisis, the industry is now going from strength to strength, says Brett Rodger, organiser of the Franchise Expo which takes place at Auckland’s ASB Showgrounds from August 13 to 15. “Last year’s Expo attracted over 3,500 visitors, 87 percent of them were interested in buying a business.”
Industry estimates suggest franchising is worth around $17.5 billion, representing up to ten percent of New Zealand’s total economic output. A Massey University/Griffith University online study, currently being conducted, may provide a better idea of its true value. (The last survey was done in 2003). In Australia it’s said that franchising is worth AU$130 billion; in the US, where the business model was developed, it’s worth US$1 trillion.
In 2008 it was reckoned that a new franchise business opened every eight minutes of every business day in the US. Given that about 50 percent of all retail sales there go through franchised businesses and there are a plethora of non-retail franchises, that was probably about right at that time, says Simon Lord, editor of Franchise New Zealand magazine and website. “Although growth will have slowed temporarily over the past two years.”
Successful franchise systems don’t just happen and anyone contemplating becoming a franchisor needs to be prepared to invest time and money to ensure they go to the market with a robust and sustainable system.
The obvious starting point is a business that will successfully transition to franchising. A profitable trading history is essential, says Win Robinson at Franchize Consultants.
“You need to have reliable figures on which to base the franchise assumptions.” And banks lending to franchisees against future business cashflow will expect to see a successful trading record, adds Daniel Cloete, national franchising manager at Westpac.
Then there’s the way the business is run. Could the day-to-day operating systems be written up as a manual to enable the business to be replicated and transferred elsewhere in the country? And does it have a unique point of difference that makes it stand out from the competition?
Stewart Germann, of Stewart Germann Law Office, whose franchising experience goes back around 30 years, recommends beginning with a feasibility study that includes not just the financials but all the modelling. But before that, make sure the trade mark is registered.
“And if you think you may want to eventually expand into Australia, register it there as well.” Germann says it’s not unusual for people who’ve been in business for some years to ask ‘what trademark?’, when discussing the possibility of franchising.
DIY a disaster recipe
Doing-it-yourself is often a recipe for a franchise disaster. Franchising may be simple in concept but getting the right structure or format in place is a complex business.
Win Robinson reports that Franchize Consultants are doing more and more reviews and remedial work on systems that were not put together properly in the first place.
“The truism in franchising is, if the franchisees are not successful, there’s no way the franchisor can be successful.”
Working with professionals experienced in the franchise arena saves time and money and problems down the track. Yes, it costs; depending on the amount of work involved it can be up to $150,000 all up, says Stewart Germann. But being sued isn’t cheap either.
A potential franchisor also needs to ask if he or she is ready for a change of focus. As a franchisor you’re in the business of finding franchisees and keeping the products or services on offer fresh and competitive.
“In order to succeed they have to be capable of managing a growing and multi-faceted business,” says Simon Lord. “They have to be leaders, communicators, motivators; the mental transition from operating a business to running a franchise is often the most difficult process of all.”
They also have to know when they’re in danger of spreading themselves too thinly and it’s time to take on staff.
Franchising is a relationship, says Germann. “The people must fit and the rules have to be followed.” He stresses the importance of two-way communication.
“One of the main complaints we hear from franchisees is that the franchisor doesn’t communicate enough. Another is that they didn’t receive enough help in relation to bedding in and getting used to the systems.”
New Zealanders like to be their own boss; buying a franchise minimises the risks. Creating that franchise can be a lengthy process but the amount of experienced qualified advice available is enormous. So use it.
Issues around intellectual property can be confusing for potential franchisors.
“In theory patents, registered designs, copyright, trade marks – both registered and unregistered – and rights in confidential information are all forms of intellectual property that may be exploited by a franchisor,” says Jason Rudkin-Binks at Hudson Gavin Martin.
But, he says, in practice a franchise is likely to be defined by one or more of the following; a strong brand (a registered trade mark), recognisable get-up (an unregistered trade mark), a defined and uniform way of operating as set out in an operations manual (copyright), and successful business systems and know-how, such as a secret recipe (confidential information). “Whatever form they take, all of these intellectual property rights should be exclusively owned by the franchisor.
“A registered trade mark is undoubtedly an, if not the, essential component of any franchise system. Registration is evidence of ownership and allows the franchisor to use statutory law to restrict use by third parties.”
IP aside, Rudkin-Binks says there are many rights to be reserved to the franchisor (termination, audit and step-in rights) and restrictions to be placed on the franchisee such as a means to ensure post term ‘copy-cat’ operations are not set up by ex-franchisees.