Buying a Franchise: Is now good

How has franchising come through the recent economic downturn? Patricia Moore checks out the state of the industry and gathers advice for future franchisees from the nation’s franchise experts.
In a somewhat tumultuous year for business, interest in becoming a franchisee rose considerably. Redundancies, and the realisation by many people, that while they still had a job, it was by no means secure, were big drivers.
“The number of people interested in franchising, and the quality of those potential franchisees, was probably the best many of our members have experienced for some time,” says Franchise Association executive director, Graham Billings.
Simon Lord, publisher of Franchise New Zealand magazine and website, says the demand for free copies of the magazine is also an indication. “By the end of August last year we’d had as many requests for copies of the magazine as we did for the whole of 2008.” And, he’s seen a “quite dramatic increase”, since around October last year, in the level of interest in specific opportunities on the website.
Interest has also been high at Franchise Expo Australia and New Zealand, says owner Elton Williams. “The New Zealand website was launched just on a year ago and has attracted 47,000 unique visitors.”
And if that doesn’t demonstrate the level of interest enough, the Franchise New Zealand website, which has been around a lot longer, has approximately 100,000 visitors per year.
However, the excitement and interest is not necessarily converting to the appointment of new franchisees. Finance – or lack of it – is still a stumbling block. Potential franchisees are also a little less confident about taking the plunge, says Lord – a point echoed by Westpac national franchising manager Daniel Cloete, who believes potential franchisees are a lot more risk averse and are looking longer and harder before making a decision.
That’s not a bad thing. Taking your time and doing the homework is vital when considering becoming a franchisee. Win Robinson, MD at Franchize Consultants (NZ) Ltd, says he’s constantly surprised at the number of people who do not seek professional advice before buying a franchise system. “They don’t see a lawyer or an accountant. They don’t even talk to a real estate consultant about the sort of site they’ll need. Then when it all turns sour they blame franchising.”
Due diligence is essential, regardless of how much you like the product. Take off the rose-coloured glasses, says Billings, who recommends people start with a copy of the latest NZ Franchisees’ Guide “And buy from a member of the Franchise Association. Members have gone through a process of documentation checking, subscribe to best practice and are expected to provide a significant amount of disclosure information.” He also advises checking to see if franchisors allow for a seven day post-purchase ‘cooling off’ period.
Buying a franchise offers a number of advantages and these are well documented.
(Search dos and don’ts or tips for franchisees on the Internet and literally millions of results are at your fingertips – such as ‘Over 200 questions to ask your franchisor’ at www.franchise.co.nz.) A proven concept greatly reduces the risk; an established and recognisable brand brings competitive advantages, and training and on-going support will be part of the system.
“Then there are the advantages gained through bulk purchasing, marketing and co-ordinated promotions, the use of established intellectual property – you’re not learning by your mistakes – and territorial guarantees of exclusivity. In some cases finance may also be available from the franchisor,” says Robinson.
Finance is the new F word for many potential borrowers and Robinson would like to see the government put in place something similar to the Small Business Administration system that exists in the US and guarantees loans to SMEs. “The interesting thing is that the rate of failure is so low it’s hardly costing the government and it’s stimulating the economy.”

Business as usual
According to the banks it’s business as usual for franchises. But they always have more of an appetite for loans that have security, personal asset backing and a well thought out business plan, says Warren Sare, national partner – franchise, at BNZ Partners.
Their criteria haven’t changed, adds Westpac’s Cloete, with some industries actually attracting more funding than normal over the past 18 months. “The fast food industry went through a really good cycle and rising gross profit margins made them very fundable.”
However, the decline in the property market has meant those who previously relied heavily on equity to get them across the funding line may have had more difficulty with their applications, says Sare. “As the property market continues to stabilise, the likelihood of funding increases accordingly.” He says BNZ’s lending to franchisees has remained stable over the past year, “if anything we’ve seen an increase in lending as we’ve grown our visibility in the sector.”
BNZ is always going to remain supportive of funding those franchisees that have solid business plans and of the sector as a whole. “Part of this commitment is evidenced through our sponsorship of the Franchise Association of NZ Conference.”
The franchise sector also continues to be a strong focus for ASB, according to franchise manager James Phillips. “People buying a franchise can still expect our support. However, as with all our dealings with borrowing customers, funding requests will be assessed on their merits.” They’re advising potential franchisees to pay close attention to return on investment. “We’ve begun to see cases where the ROI is too low to make the business attractive or even viable.”
A force to reckon with
Franchising in New Zealand is a significant force; around 350 franchise systems operate in the market and Simon Lord estimates that there are close to 20,000 franchisees employing 100,000 people, with a turnover of around $17.5 billion.
A more accurate picture will emerge following a major franchise survey being done this year through Massey University, says Graham Billings. “This will be a much more developed survey – the last was back in 2003 – and will be the first of what we intend to be a biennial survey.”
The past year wasn’t all bad for franchisees. As with business across the board, some did well and some suffered. Fast food and service type industries perhaps fared better than most. People still need to eat and, “no matter what the state of the economy people continue to pay for the jobs they don’t want to do,” says Billings. “The fact remains, the success rate of someone moving into a franchise is better than the success rate of someone starting a business from scratch.”
Patricia Moore is an Auckland-based freelance writer. Email [email protected]

A checklist for franchise wannabes:
= What do you want in a business? Is it something you’d enjoy doing. Don’t be too hard and fast. Decide what broadly fits. If you’re not an early riser a bakery is out; if you hate getting wet forget lawnmowing!
= Part or full-time? Involvement of other family members?
= Look for proven potential. Do NOT buy an untried franchise – there are no statistics on which to base assumptions.
= Due diligence is essential. Seek professional advice – lawyers, accountants and finance professionals who specialise in franchising.
= What set up costs are involved?
= Does the ROI make the business viable?
= Talk to other franchisees in the group – ask about the relationship with the franchisor. Do they deliver as promised? Are there franchisees in the group that could adversely affect the brand?
= Develop a business plan – your bank will insist on this. It’s a document that will keep you focused. It must also be regularly updated.
= Don’t be rushed into signing anything and get everything in writing.
= Always plan for expenses greater than you think you’ll have.