Franchising 101

Franchising in New Zealand is not taken seriously enough as a business concept. This is the view of Patrick Learmonth, franchise specialist with Kensington Swan. Problem areas include a lack of legislation, and treating franchise agreements as ‘just another business deal’, he says.

The result is that franchisees frequently end up not getting the advice they should.

“They enter into deals but wake up once the honeymoon’s over, suddenly realising what they’ve got into.”

Learmonth would like to see leadership from government. “There’s concern about people putting money into finance companies and rest homes and property – why should investing in franchises be any different?”

(The introduction of franchise specific law is currently being debated with some supporting the current system of self-regulation and others in favour of following Australia and legislating to protect franchisees.)

The franchise sector is substantially larger than many people realise, says Graham Billings, GM of the Franchise Association of New Zealand (FANZ). Current estimates suggest turnover of between $15 billion and $20 billion, representing between eight percent and ten percent of GDP. Around 350 franchise systems currently operate here – roughly 75 percent of which are home-grown. And, with approximately 14,000 franchisees employing something like 100,000 people, franchising has obviously found favour with Kiwis who want to be their own boss.

Indeed, as the number of redundancies grows and more people feel the chill winds of looming unemployment, being your own boss does begin to sound like a great option.

Adam Dunkerley, of franchised computer repair specialists Need A Nerd, reports ‘huge interest’ over the past few months.

“Where we’d be talking to two or three potential franchisees, now it’s closer to 20.” Approximately ten percent of those enquiries have come from someone in a redundancy situation, he says. Another upside of the current recession is the growing volume of work, he says. “Customers are repairing computers rather than replacing them.”

Franchisors are currently getting enquiries from good quality people, says Simon Lord, publisher of Franchise New Zealand magazine, and regular NZBusiness columnist, “not just those in pipe-dream land.”

But uncertainty about economic prospects and the availability of finance can be sticking points, says Lord. “While the banks will still fund a good business proposition which has adequate security, a lot of people are highly geared and that reduces the level of security.”

“The funders who really understand the business model will still be able to assist,” says Daniel Cloete, Westpac’s national franchising manager. “This is one of the strengths of franchising – comparing results and projections and getting to a much more informed position before deciding, thereby lowering risk.”

But times are tough. Is franchising the answer? 

Starting a business from scratch carries more of a risk, says Win Robinson of Franchize Consultants. “Buying into a proven business format and a success history can be a wiser thing to do.” However he says, there’s still some risk in that the franchise type of business may not be suited to the individual. “It’s essential that the franchisor puts considerable effort into working out a franchisee profile.”

The current business environment could open opportunities for new franchise systems from sectors serviced by fragmented operators struggling on their own – this according to James Phillips, franchising manager for ASB Business Banking.

“Existing operators simply convert to the new system, and don’t have to carry the full capital costs of equipment, stock and fit-out.”

For buyers after a business that’s been proved to work – and comes with step-by-step instructions covering almost every possible contingency – a franchise could well be the answer. However, if you’re the entrepreneurial type, chances are the franchise business model won’t suit you; a franchisee must stick to the systems in place – changing the rules just isn’t an option.

Do your homework

The key to any successful venture, be it scaling a mountain or building a business, is doing your homework. There’s a huge amount of information and professional advice available to both potential franchisors and franchisees (Google ‘franchise’ and you’ll get around 18 million results). The good stuff all says the same thing; get professional advice. And that doesn’t mean the family lawyer or a mate who ‘does the books’.

Talk to the franchise experts – legal, accounting and finance professionals who understand franchising. They may not be able to build a burger or look happy behind a lawnmower, but they know what’s what when it comes to contracts and dollars. And if they’re asking the hard questions, remember, that’s what you’re paying them for.

“There are some great franchise opportunities out there, and some that may be not so great,” says James Phillips. “Like any business decision people need to do their homework, check things out and involve their professional advisers in the due diligence.”

He says franchise purchasers also need to look at their own skill base and be clear on what they are bringing to the table, what is required to achieve success, and exactly what the franchisor is offering, so that there are no surprises along the way.

“People need to get smarter in selecting an industry or business they can really get involved in,” says Robinson. “They need to do their due diligence to confirm that what they are looking at is suitable for them and that the network performs to the satisfaction of the franchisees.”

New franchises are starting up all the time, says Viv Vesty, senior manager franchising and professional business at the National Bank. “Except for last year, we’ve seen franchising, as an industry, grow by about 15 to 20 percent over the last five years.”

If the concept is brand new, the risk is high, she says, with the cost of getting started a barrier for many. Taking into account feasibility studies, registration of intellectual property and manuals, disclosure documents and drawing up franchise agreements, it can run to around $80,000, she says.

“Running a franchise system means asking people to invest in your business; you have a duty of care to ensure it is a robust, profitable and proven system from the outset.”

There’s a degree of naivety around how easy it is to set up a franchise, says Patrick Learmonth. “There’s a lot more involved than people appreciate and there’s certainly no fast buck in it. It requires a lot of hard work and a lot of investment.”

Being a franchisor also requires a different set of business skills. “It’s one thing to set up a business and run that successfully and maybe have a second outlet somewhere. Managing a whole chain of individual owners requires quite different skills.”

Is now good?

Given the state of the economy and the bleak prospects for many businesses, is the time right to be launching a new franchise?

Patrick Learmonth: “If you want to start a new franchise system you’re going to have to work very, very hard and you’re going to have to come up with a proposition that really does work, where cashflow is clear and funding is not a problem. There are some great deals in terms of leasing and the assets needed to run a business, but boy, you’d better have a good business proposition.”

Westpac’s Cloete also sees some positives in the current economic climate. “Rents may be more reasonable, good sites are becoming available, landlords may be prepared to make fit-out contributions, and less competition and initial rental-free periods can assist new businesses.” Good staff may also be easier to find, he says.

Naivety is not limited to wannabe franchisors. Too many potential franchisees let their hearts rule their heads, either by getting into a franchise system because they like the product or by ignoring available advice.

“Some people wear hugely rose-coloured glasses,” says Graham Billings. “There are two issues they need to understand. One is why they want to get into franchising and which one to choose – the other is that it’s their business, they have to drive it.”

The transition for franchisees, who have probably always been in the corporate world, and had a manager to whom they could pass the buck, can be difficult, he says.

So will those rose-tinted spectacles see franchisees falling by the wayside?

Billings recently attended the Victorian State franchising conference where one of the speakers drew a parallel between Darwin’s theory of survival of the fittest and the Darwin awards – the posthumous awards given to those whose early (and usually ludicrous) exit from the gene pool actually helps us all.

“Good franchise systems with the ability to adapt will get stronger. Those who do nothing and wait for things to get better will become victims.”