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WHAT TO EXPECT WHEN YOU BUY A FRANCHISE

by Philip Morrison,
last updated 30/04/2018

Philip Morrison looks at ten common questions people have when they’re buying a franchise

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Franchising can be a great way to get into business for yourself, but if you’ve never been self-employed before then it’s important to go in with your eyes open – to take off the rose-tinted glasses and be aware of the realities of owning your own business. That’s especially the case when it comes to financial matters. Here are 10 areas where newcomers often don’t know what to expect.

1. Set-up costs – what’s included and what’s not?

Franchises come in many different types and sizes; you can buy a franchise for as little as $5,000 or more than $1,000,000. But however much you’re planning to spend, you need to know what is included and what is not before you sign the contract. When considering set-up costs, some of the common areas to investigate are:

What does the franchise fee cover? Normally, it will cover the right to use the brand and systems – but what else is included? A launch promotion and initial marketing? Manuals? Training? If training is provided, does it take place in NZ or overseas? Who pays for the travel and accommodation costs?  Do you get paid while you are training, or do you have to allow for this when planning your budget? Is there a work guarantee or an income guarantee? When do they apply and for how long?

Set-up costs will vary considerably depending on the type of franchise you have chosen: for example, home-based, mobile or premises-based? Do you have to provide a rental bond? Are there any fit-out costs? Is the fit-out on a fixed price contract or just an estimate? Is external signage included? Do you require a vehicle? What type? Must it be new or second hand? Is signwriting included or additional? What equipment or initial stock costs will be incurred? Can items be leased to preserve initial capital?

Any good franchisor will detail all the above prior to signing so that you don’t find yourself faced with unexpected costs. However, it’s important for you to know whether or not such costs are included in the figure initially quoted to you.

One question often overlooked is: have adequate provisions been made for professional costs – your lawyer’s and accountant’s advice? Who pays the franchisor’s legal costs? Are the costs of leasing negotiations allowed for?

Don’t make assumptions on any of these areas: be specific with your questions and your research. There’s a helpful list here of 250 Questions To Ask Your Franchisor.

2. Ongoing fees – how much, what for and when?

All franchise systems require their franchisees to pay ongoing fees in some way, whether as a flat fee, a percentage of turnover, a mark-up on products or services provided or some other approach. These fees are the life blood of the franchise system; they fund various services from the franchisor such as support, analysis and development, and also provide the franchisor with the return on their own investment.

Ongoing fees, sometimes called royalties, management fees or licence fees, are separate to and additional to the upfront franchise fee you paid at the beginning. As the name suggests, they are payable on a regular basis – often weekly or monthly – throughout the term of the franchise agreement.

There is no ‘standard’ rate; fees vary according to the services which they pay for. Potential franchisees should avoid choosing a franchise based on lowest fees alone, as an under-funded franchisor may struggle to deliver on support and system improvements. Remember, keeping field support staff on the road or developing new online systems is expensive. It’s better to find out what you will get for your money and whether existing franchisees feel that they get value for money for their fees (see the list of 50 Questions To Ask Franchisees at www.franchise.co.nz).

One question we are often asked is, ‘Can I negotiate the fees downwards?’ The answer is almost certainly no; fees have been calculated to support a certain level of services and return, and should be the same for every franchisee in the network.

In addition to the normal ongoing fees, there may also be specific fees charged for other services (see the article on page 50). All of these fees need to be factored into your cash flow planning. In many cases, defaulting on paying your franchise fees will mean you are in breach of the terms of your franchise agreement and face the risk of losing your franchise.

3. Ongoing costs – what’s included?

It’s important to realise that when you buy a franchise, you are running your own business. The ongoing fees that you pay will provide some services, as detailed above, but you will be responsible for...

 

This article appears in full in the latest issue of Franchise New Zealand magazine (Year 27 Issue 1). Read the entire article in the digital magazine or, if you live in New Zealand please send for your free print copy.

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