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THINKING OF BUYING A FRANCHISE BUSINESS?
With interest rates dropping, agriculture doing well and tourism improving, disposable income is projected to increase, prompting more people to look at going into business. Westpac’s Daniel Cloete looks at questions to ask to become an educated franchise buyer.
Last year was a tough year for many small businesses in New Zealand, especially for industries such as hospitality, construction and retail. Some are still struggling to return to profitability, due to a combination of margin pressures and sales. As a result, many franchise systems have been tweaking their business models to support franchisee profitability. The good news is that our economists feel some of the big financial headwinds we’ve been wrestling with are now easing, and higher
Potential franchisees
For potential franchisees there are many issues to consider and many questions to ask. Firstly, there are questions about the industry they plan to go into. Then, questions around which specific system and location. This is normally followed by a more detailed financial due diligence process, some of which we covered in our ‘Due Diligence – Getting it Right’ article.
The secret is to become an educated franchise buyer ; asking the right questions, from the right people, at each stage. Compared to a decade ago, there is ever more information online from banks and other professional service providers. Unfortunately, potential franchisees don’t always use these resources, or don’t spend enough time doing proper due diligence.
Although there are more to consider, here are some main points to direct your initial enquiries.
Industry and trends
Before starting to look at franchise systems, ask questions about the viability and trends in the industry you are considering.
Questions to ask yourself about your franchise should include:
• Is there a real need for this product/service?
• How stable is that need?
• Is the product/service still growing as a category?
• How large is the current market and the potential market?
• How much competition is there in the category already?
• How long have those companies been established?
• Are there several franchises to choose from?
• What do they have in common?
• How are they different? Is that important?
Questions to ask the franchisor
Ask for all the details on the terms of the franchise agreement. This can, for instance, be five years, with right of renewal for another five years.
If buying an existing business, check how much of the term of the franchise agreement is left - do you get a new term? Are there any transfer fees or renewal fees payable?
You franchise lawyer will be able to explain these issues to you.
• What fees are payable, initially (franchise fee) and ongoing?
• What do you get for these payments? For example, training, intellectual property, lower prices from suppliers etc.
• What evidence is there that the franchisor continues to invest in the system? This includes renewal of the concept, products, management information, using AI and other systems. This is very important if the individual franchisees want to stay competitive and profitable.
• Is multi-unit franchising available? Many franchisors prefer owners operate the units but if you want to grow the business to include several units, make sure this would be possible. One franchisee owning several franchises is becoming more common; studies in the US have shown 20% of franchisees now own 52% of outlets.
• Is the franchisor a member of Franchise Association of New Zealand?
• Do they have a disclosure document? If not, how can you source that information?
• How many franchises are there? Have any failed? If so, why?
• What levels of training and support are provided? Do they fit with your needs? How long are these available for? Do they include staff?
Questions to ask other franchisees
Franchisees normally love to talk about their business. You will typically be able to learn a great deal from them, ranging from operations to profitability, cost structures, support provided, and more.
For first time buyers, probably after signing a confidentiality agreement, the franchisor may provide a list of franchisees to talk to. Contacting other franchisees in the system can be very enlightening.
• Is the franchise what they expected?
• What hours do they work?
• How supportive is the franchisor?
• What do customers think of the franchise?
• Does the franchise have a Code of Practice? How is it enforced?
If the answers to any of these questions are ‘no’, find out why.
Similarly, ask your specialist franchise lawyer to explain your rights and commitments under the franchise agreement. If it is a retail business, check the terms and conditions of the lease for the premises to check it isn’t expiring soon or increasing dramatically.
Next time, we will cover how to turn the dream into reality through the right questions to ask about funding the business, in more detail.
This is far from an exhaustive list. Get all the answers to all your questions. And if you have any more questions, ask them. If you don’t understand, or need more detail, say so. Don’t feel guilty for asking lots of questions – your money, livelihood and future are at stake.
About the author
Daniel Cloete is an Area Manager Business and the National Franchising Manager for Westpac. Contact the Westpac Franchise Team on 0800 177 007 or Email: franchising@westpac.co.nz
The information contained in this article is intended as a guide only and is not intended as an exhaustive list of matters to be considered. Persons entering into franchise agreements should seek their own professional legal, accounting and other advice.
