A 2017 Survey of New Zealand franchising, conducted by Massey University (Auckland) and Griffith University (Queensland, Australia) demonstrated the growing popularity of franchising in New Zealand.
Some of the results from the Survey were as follows:
The number of business format franchise systems operating in New Zealand increased to 631, compared to 446 in 2012.
Franchising covers a wide range of industry categories and sub-sectors. Among them are Retail Trade, (23%), Other Services (20%), Accommodation and Food Retail (18%) and Administration and Support Services (8%). The median total start-up cost for a franchisee was $308,500 for Retail and $87,550 for Non-Retail.
Sales turnover for the entire franchising sector was estimated at $46.1 billion.
Excellent Entry Point
It is clear from the Survey that business format franchising is growing in New Zealand and franchises can be an excellent entry point into owning businesses, especially for first-time buyers. However, before you sign any agreement, you must always conduct thorough due diligence on both the franchise and franchisor and you should obtain independent legal advice.
All franchisors who are members of the Franchise Association of New Zealand (FANZ) must provide a disclosure document that provides details on the franchisor and the financial background and how much you are expected to pay each month.
If the franchisor is not a part of FANZ, it should still provide the earnings history of the franchise, how long it has been operating and the number of stores.
We always recommend that you talk to other current franchisees about the franchise.
The franchisor should provide current franchisee details for you to contact three or more franchisees. When you speak to the other franchisees, do not be afraid to ask about the earnings potential as advised by the franchisor and the robustness of the franchisor/franchisee relationship.
The franchisor should also provide a breakdown of the costs involved in entering into the franchise. This should include training costs and monthly payments as well as the working capital required. Sometimes, the franchisor will include indications of legal and accounting fees but we do not recommend relying such figures as these fees will be advised by your accountant and your legal advisor.
The franchisor will usually provide a draft franchise agreement for you to review. You should look at the nature and extent of your obligations and that of the franchisor, your rights to renew or sell the franchised business, and your territory and restraint provisions.
Engaging an Accountant
You should also engage an accountant to look over all the financial statements provided by the franchisor. Some franchisors require that your accountant provides a certificate confirming you have been provided with financial advice.
You should be wary if the franchisor is not willing to provide any of the above information, demands that you pay a deposit before you see any documents or information or promises ‘big profits’ but is unable to provide any further details.
This is a big ‘red flag’ and you should not enter into any further negotiations or sign any agreement until the franchisor provides you with details about the franchise. It is better to invest time and money on research, rather than signing a franchise agreement without doing any due diligence.
The money spent trying to resolve the issues will far outweigh any money you would have spent on obtaining initial accounting and legal advice.
Khushbu Sundarji is an Associate at the Stewart Germann Law Office based in Auckland.
Phone: (09) 3089925; firstname.lastname@example.org; website www.germann.co.nz
Legal Disclaimer: The above article should be considered only a general guideline and not as specific advice. Indian Newslink and its Management, Stewart Germann Law Office and Khushbu Sundarji absolve themselves of all obligations in this connection. Please consult your lawyer and/or accountant before taking up any business mentioned in the above article.