buying, selling, or setting up a franchise? get the right legal advice from the franchise specialists
WHAT TO Philip Morrison looks at ten common questions about money that come up when buying a franchise
ranchising can be a great way to get into business for yourself, but if youâ€™ve never been self-employed before then itâ€™s important to go in with your eyes open â€“ to take off the rose-tinted glasses and be aware of the realities of owning your own business. Thatâ€™s especially the case when it comes to financial matters. Here are 10 areas where newcomers often donâ€™t know what to expect.
1 set-up costs â€“ whatâ€™s included, whatâ€™s not? Franchises come in many different types and sizes; you can buy a franchise for as little as $5,000 or more than $1,000,000. But however much youâ€™re planning to spend, you need to know what is included and what is not before you sign the contract. When considering set-up costs, some of the common areas to investigate are:
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Set-up costs will vary considerably depending on the type of franchise you have chosen: for example, home-based, mobile or premises-based? Do you have to provide a rental bond? Are there any fit-out costs? Is the fit-out on a fixed price contract or just an estimate? Is external signage included? Do you require a vehicle? What type? Must it be new or second hand? Is signwriting included or additional? What equipment or initial stock costs will be incurred? Can items be leased to preserve initial capital? Any good franchisor will detail all the above prior to signing so that you donâ€™t find yourself faced with unexpected costs. However, itâ€™s important for you to know whether or not such costs are included in the figure initially quoted to you.
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One question often overlooked is: have adequate provisions been made for professional costs â€“ your lawyerâ€™s and accountantâ€™s advice? Who pays the franchisorâ€™s legal costs? Are the costs of leasing negotiations allowed for?
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Donâ€™t make assumptions on any of these areas: be specific with your questions and your research. Thereâ€™s a helpful list of 250 Questions To Ask Your Franchisor at www.franchise.co.nz.
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What does the franchise fee cover? Normally, it will cover the right to use the brand and systems â€“ but what else is included? A launch promotion and initial marketing? Manuals? Training? If training is provided, does it take place in NZ or overseas? Who pays for the travel and accommodation costs? Do you get paid while you are training, or do you have to allow for this when planning your budget? Is there a work guarantee or an income guarantee? When do they apply and for how long?
2 ongoing fees â€“ how much, what for and when?
All franchise systems require their franchisees to pay ongoing fees in some way (see the article on page 40). These are separate to and additional to the upfront franchise fee you paid at the beginning. One question we are often asked is, â€˜Can I negotiate the fees downwards?â€™ The answer is almost certainly no; fees have been calculated to support a certain level of services and return, and should be the same for every franchisee in the network. In addition to the normal ongoing fees, there may also be specific fees charged for other services All of these fees need to be factored into your cash flow planning. In many cases, defaulting on paying your franchise fees will mean you are in breach of the terms of your franchise agreement and face the risk of losing your franchise.
3 ongoing costs â€“ whatâ€™s included? Itâ€™s important to realise that when you buy a franchise, you are running your own business. The ongoing fees that you pay will provide some services, as detailed above, but you will be responsible for everything else: rent, rates, repairs, stock, equipment maintenance, point of sales systems, staff wages, KiwiSaver contributions, fuel, power bills, local advertising, etc, etc. All of these have to be budgeted for and included in your cash flow projections. The good news is that although you have to pay these costs, your franchisor should be able to give you a clear guide as to how much they will be and provide systems for you to calculate and manage them. Even better, the Franchise New Zealand
Year 27 Issue 01