Kiwis buy into brand formulas

A basic franchise, such as lawnmowing, might provide income from the first day. Photo / Northern Advocate

As the recession has hit New Zealand's workforce, the number of people considering buying a franchise has soared.

Someone else has set up the brand, there's a need for the product - all they have to do is sign up and buy in. But experts say it isn't as easy as signing an agreement, becoming the boss and watching the money roll in.

Westpac has seen a big increase in people asking about finance to get into a franchise, says Daniel Cloete, national franchising manager. Many of them have been looking to invest a redundancy payout.

"And the number of conversions - that's people who actually do buy the business - has also increased."

Simon Lord, the publisher of Franchise NZ magazine, has seen a similar rise. He says the first thing for would-be franchisees to get clear is what a franchise is.

Broadly, a franchise involves someone (the franchisor) creating a system and then replicating the business, giving others (franchisees) the right to operate the same system, under the same name, for a fixed term.

The franchisor makes money from the franchise purchase and ongoing franchise fees.

Because franchisees are selected for their aptitude and guided through a training process, a franchise business can be a safer bet for those striking out on their own. Lord says: "Very few franchisors would sell a franchise if they did not think it would succeed."

The franchisor will have tried different methods to build the business, and will be able to tell franchisees what will work.

"You get a brand name, a product or service with a profit margin built in, a market for it, and buying power," Lord says.

Cloete agrees franchises are less risky than other small businesses. Banks are more likely to lend to them, because they have proven systems.

"We can compare the franchise to other, similar businesses and get a good idea of the business fundamentals - it allows us to do much more aggressive lending."

People should work out what industry they want to be in, what they want to get out of the business, and what they are willing to put in. Lord warns: "Look for something that is of interest to you - you're going to be working really hard in it for the first couple of years at least. "Choose something that suits your abilities and skills. You need to enjoy it and you need to get the results you want, such as flexible working hours, financial return, the potential to build up the business and sell it on or the ability to work with family."

Franchises can be bought for as little as $5000 but Lord says what you get out of it depends on what you invest.

A basic franchise, such as lawnmowing, might provide income from the first day, but a fast food restaurant might find it tough for a couple of years.

Potential franchisees should also investigate the industry, considering potential threats to its future.

Lord says if you talk to franchisors and don't get on, don't sign up.

When it comes to signing the agreement, franchisees cannot ask too many questions. Lord's website has 230 examples to put to franchisors. Any figures, such as potential income, should be scrutinised carefully.

Talk to other franchisees to find out the reality of the business, and get a specialist lawyer and accountant's advice.

Miles Agmen-Smith, a commercial lawyer who specialises in franchises, says the agreement is like a lease.

"It's only a right to use a business for a set term, possibly with some renewals."

A typical agreement could be anything from 20 to 50 pages, accompanied by a manual laying out the basic operation of the business. The agreement covers the rules both parties have to live by. It should include things like the ongoing franchise fees, levies for advertising and other costs, such as required stock levels.

The major downside with franchising is it allows you to be your own boss only to a point.

Lord says: "You're not totally free to do anything you want with the business. You have to work within the parameters set by the franchisor."

And it's not easy to get out of an agreement early. Agmen-Smith says: "It's a binding obligation for a term, providing the other side does its part. It's important to be very clear at the beginning about [the rights of both parties] in different situations."

There is no specific legislation covering the franchisee/franchisor agreement. Generally, a franchise cannot be sold on to just anyone - the franchisor has to give the okay.

He says: "It's up to you to make your own decision. Ultimately the buck rests with you. It's not like being employed, the franchisor won't pay your salary and won't be on your back all the time. You'll get a huge amount of help and support but ultimately you have to make it work."