Franchises: Buyers beware

Photo / Michael Bradley

There is no such thing as buying your own job despite some people believing that purchasing a franchise does just that. Any financial investment involves uncertainty and becoming a franchisee bears risks as well as the potential for rewards.

Franchises are a growing business sector in New Zealand and people find them attractive because someone else, the franchisor, has already taken the business start-up gamble and now has knowledge and experience to share.

In New Zealand there's no specific legislation to protect either the franchisor or the franchisee.

So it's a case of buyer beware, particularly if the franchisor does not belong to the Franchise Association of New Zealand, the organisation's chief executive Peter Fergusson says.

A code of ethics and practice binds members.

Their businesses are independently scrutinised every second year to make sure standards are met.

"When a buyer sees the logo they have at least some belief that there is a set of ethics and practice behind that company, that they meet certain business standards," Fergusson says.

When buying a franchise, people should perform normal due diligence and take advice at least from an accountant and lawyer experienced in the industry.

Bank staff can be a knowledgeable source if they have dealt with franchises before.

There's lots of paper work involved and the franchise agreement documents need to be carefully analysed, so it's not a thing to rush in to.

"You need to understand what the agreement is so you can make an informed decision, to get past the terminology to look at the results of not doing or doing things," Glaister Ennor associate Louise Quinn says.

People can be naïve and gullible or "see what they want to see" while missing some important things, the lawyer says.

She advises canvassing the terms of supply. Franchise agreements can include compulsory arrangements to purchase product from the franchisor, but people sometimes don't study the ramifications of this part of the deal.

"It is extremely important as the day-to-day operations can be left out of an agreement," Quinn says.

The franchise association has tips for potential franchisees on its website: www.franchiseassociation. org.nz

Fergusson advises a careful check of disclosure documents for information on franchisors' trading entities, financial backing, length of operation, details of suppliers, how sites are selected, and the litigation record.