Legal

FRANCHISING TO GROW YOUR BUSINESS

By Andrew Skinner of Auckland law firm Martelli McKegg

If you are experiencing growth in your business and considering how to expand your footprint then one option would be to consider franchising. New Zealand has a strong and successful franchising history and according to the latest Massey University survey results has 590 franchisors of business systems with sales turnover estimated at $37 billion.

fRANcHISING provides an opportunity to expand your footprint in new areas without needing to stump up all the extra capital yourself. If you have a strong brand and good systems for operating your business then read on to learn the basics of franchising.

HOw DOES fRANcHISING wORk?

Franchising is a business model where a business owner (Franchisor) grants to another person (Franchisee) a licence to use their brand and rights to operate their business system in another location. The franchising relationship is governed by a detailed franchise agreement, which allows the Franchisee to use the trademarks, branding and operating system of the Franchisor’s business in return for paying certain fees. The Franchisee will receive initial training and mentorship from the Franchisor when setting up the new franchise business. Importantly, the franchisee will be responsible for all the capital and operating costs of the new franchise business. The Franchisor will need to prepare an operations manual, which acts as the bible for running the business. It governs the franchise’s performance, procedures and conduct. The franchise agreement will ensure that the Franchisee cannot deviate from the Franchisor’s operations manual and procedures. New Zealand does not have specific legislation that governs how Franchisors are required to operate in relation to a Franchisee. Franchisors are not obliged to disclose any specific information regarding their business to potential Franchisees so caveat emptor (buyer beware) will apply. This puts the onus on the Franchisee to investigate whether the opportunity is right for them and ask the Franchisor the right questions to understand what they are getting into. If the Franchisor is a member of the Franchise Association of New Zealand (FANZ) then the Franchisor will be required to provide potential Franchisees with a disclosure document. The disclosure document will have specific information (as set by FANZ) regarding the franchise to provide to the Franchisee. Membership to FANZ is beneficial to Franchisors as you join a community of franchisors who share information and experiences and promote best practices within franchising.

kEY fEATURES TO HAVE A SUccESSfUL fRANcHISE SYSTEM 01. DISTINGUISHABLE

Your product or services do not have to be unique but you do need to set yourself apart from your competitors. It could simply be the way you run your business that

sets you apart from the rest, such as better technology systems or unique branding.

02.STRONG TRAck REcORD

You will need to show that your business model works and is profitable for other people to want to buy in. You will need to work out how long it will take for new Franchisees to build a client base and turnover in new areas to the point that they can be self sustaining. The franchise agreement will also need to give the Franchisees enough time to make a fair return on their investment once the franchise is self sustaining.

03.REPLIcABLE

Your business model will need to be easy to replicate. The power of a franchise is the ability to replicate the same business model for a different customer base in a different location. You will need to be able to teach someone your business quickly so they can carry it on without your input.

THE BENEfITS fOR A fRANcHISOR

Franchising is a cost effective way to expand your business into a national or even international footprint. The main barrier that businesses face when looking to expand is the amount of capital and labour that it requires to operate in new markets. Franchisees will spend their own

This puts the onus on the Franchisee to investigate whether the opportunity is right for them and ask the Franchisor the right questions to understand what they are getting into.

capital and labour to grow the franchise in new territories and they will carry the majority of risk. Franchisees will front the operating costs for running the franchise and will be required to pay the Franchisor franchise fees, which is usually a percentage of the monthly revenue of the business. The Franchisor will not have to be involved in the day to day management of the business but will be required to provide oversight in a system development/mentoring role. This will free up the Franchisor to attract new Franchisees or focus on other initiatives. The franchise agreement will set performance goals that the Franchisee will be required to meet on an ongoing basis to be able to continue using the systems. This incentivises the Franchisee to grow the business as they will be rewarded if the business succeeds.

THE BENEfITS fOR A fRANcHISEE

Franchisees are able to buy into an already successful business model that has proven systems in place. They can skip the start-up stage which is often the difficult part as you need test an unproven concept in the market. The Franchisee can hit the ground running with a proven concept that has name recognition. While the franchise agreement restricts the Franchisee from deviating from the business model and systems (without the Franchisor’s consent) the Franchisee will still own their own business and will be working for themselves. If the Franchisee is successful, they will often be rewarded with more freedom and may be invited to develop and improve on the systems with the Franchisor. Franchising is a great way to grow your business but care is needed to do it properly. This article provides an overview of some of the important concepts but obtaining the right advice to guide you through the process is very important. ■

Andrew Skinner has over 20 years of experience as a commercial lawyer and is a partner in the Auckland firm Martelli McKegg. Andrew’s phone number is (09) 300 7622 and his e-mail address is andrew.skinner@martellimckegg.co.nz. This article is not intended to be relied upon as legal advice.

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