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What you need to consider when buying into a franchise

Wednesday 4 July 2018

In New Zealand and around the world, many successful businesses operate by way of franchise. A franchise system is established and run by the franchisor. It normally has an established product or service with established name and reputation. A franchise often has good systems for product service management, as well as business management.


Examples of successful franchises are Domino’s Pizzas, Crest Cleaning, Mike Pero Mortgages and Night ‘n Day stores. The product or services is clearly identifiable and the reputation well established in the market.


If you are buying into a franchise, you will be a franchisee. You will be granted the right to use the name of the franchise and operate the franchise business within a specified geographical area known as Territory. Often you will pay a significant purchase price to the franchisor or another franchisee to buy into the franchise. You are paying a value for the goodwill associated with the franchise and the use of their system. Training is often required and the training fee is either factored into your franchise entry fee or it may be additional.


Franchise agreements govern the relationship between the franchisor and the franchisee. Often they give the franchisor very wide powers to control the franchise operation. A good franchise agreement should, however, offer certain minimum protections for the franchisee and provide a fair return to you. It is important for example to look at what on-going payments you must make to the franchisor and what returns they provide to you. Furthermore, whether you have exclusive right to operate within your territory is important. If not, you should consider how your rights of operating within your territory will be protected.


An important way of obtaining a return on your investment in a franchise is by building up your franchise and selling your franchise to another franchisee. It is therefore important to consider the process you have to follow in exiting the franchise and what requirements you must meet at that point. Again, you must ensure that your ability to sell is not unduly hampered by restrictions imposed by the franchisor.


Ultimately the relationship between a franchisor and a franchisee is one of mutual reliance. A franchisor normally receives a percentage of the revenue of the franchisee. Before buying into a franchise, it is important to investigate how the franchise has been operating in NZ. You should talk to other franchisees and ask for references. Don’t be afraid to ask detailed questions, as ultimately that is how you will find out whether the franchise will deliver what you expect.


Teresa Chan has advised many clients on purchasing into franchises over the years. She has also advised clients who are considering setting up a franchise and how to go about doing that. If you are an intending franchisor or franchisee, you should contact Teresa for specific advice.


Articles on this website are for general information only. If you require specific advice, please contact us.

KEYWORDS: franchisor, franchisee, franchise agreement
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