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SURVEY REVIEW: NEW FRANCHISES REQUIRE CARE

by Simon Lord,
last updated 28/09/2017

A large number of new franchises have launched on to the New Zealand market over the last five years. Simon Lord suggests some things to watch out for

According to the latest Franchising New Zealand survey from Massey University and Griffith University, there are 631 franchises in this country. 185 of those are new brands which have opened here in the last five years. That’s an impressive level of growth, but the emergence of so many new franchises raises some interesting questions for franchise buyers and intending franchisors.

Newer franchises offer many advantages to buyers – they can have the latest technology and common systems throughout the franchise, enabling better sharing of information, and they can also offer franchisees a choice of good locations which might already have been taken in more mature systems. What they don’t necessarily have, though, is the experience of guiding a franchised business through the inevitable ups and downs of the economic cycle.

Lessons from the GFC

One of the lessons to come out of the GFC was that some franchisors who had only ever known good times suffered badly when faced with a shrinking economy and reduced consumer spending – and so did their franchisees. If their business model was not properly structured, it wasn’t resilient enough to allow the franchisees to ride out the downturn. The result was that, in the difficult years after 2008, some franchisees failed. That was terrible for the people concerned, and it also had an impact on the brand, the other franchisees and the franchisor, too.

At that time, the best franchisors put a lot of effort into supporting their franchisees. More importantly, they went on reviewing their supply chains, systems and funding models long after the economy recovered to help ensure that both they and their franchisees have robust structures which best position them to withstand future shocks.

Franchisees pay for experience

A lot of franchisors have, of course, lived through good times and bad before – in fact, some 50 percent of the franchises in New Zealand have been operating since before the turn of the century, and a further 36 percent since before 2010. On average, the survey found, franchisors have some 25 years of operational experience and 17.5 years of franchising experience. The reassurance provided by that experience is what franchisees are paying for.

But what of the 185 new franchises out there? Well, many of them will have considerable operational experience too – but they won’t have franchised before. Another group will be overseas brands with lots of franchising experience – but they won’t know the local market. And some will be local master franchisees, who enjoy the advantages of proven systems and local knowledge – but may never have run a franchise.

Each of these approaches has advantages but it also has pitfalls. As long as those pitfalls are addressed prior to franchising through using specialist advisors who can fill in the gaps – whether financial, structural, market intelligence, property negotiation or whatever – then the franchise and its franchisees stand every chance of becoming established and succeeding. Fail to fill the gaps, though, and when the good times turn tough again, the cracks will soon show.

Get the advice you need

So if the results of the 2017 survey encourage you to look at franchising, you need to be aware that not all franchises are created equally. A new franchise may have demonstrated rapid expansion and impressive results in recent years, but how will it perform when the economy slows – as it inevitably will, some day?

Getting it right depends on getting the right advice before you start. For franchisors, that means talking to consultants who will help them develop a sustainable structure or adapt an overseas structure for the local market. For franchise buyers, it means consulting a specialist franchise accountant and franchise lawyer who will have seen all kinds of start-ups before and know what questions to ask on your behalf and what to look for.

Many of those 185 new franchises will go on to be high achievers but history suggests that a few, sadly, will not. Make sure that your venture is sustainable by getting the advice you need.

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