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by Rory MacDonald,
last updated 26/05/2010

Reputable franchisors never use high-pressure sales tactics, but some companies do. Rory MacDonald suggests some of the tricks to look out for and why you should never be hurried into making a decision.

I answered an advert in the paper for a great new business opportunity and was invited to meet with the company executives at a city hotel. The company is new to New Zealand but has been going really well overseas - they showed me the figures to prove it. They are expecting to sell all the NZ territories within a week, and asked me to pay a deposit of several thousand dollars on the spot in order to reserve my chosen territory. Is this normal practice?

Be very wary about dealing with company executives at city hotels! Be even more wary about dealing with companies that are new to New Zealand - even if they have, apparently, been successful offshore.

Entering into deals that are made in a hurry can be a recipe for disaster. Approach any franchisor with caution as you would with any prospective business vendor. You need to get to know the franchisor and feel comfortable with them. You need to understand the products or the services that the franchisor is promoting, and know that selling or promoting that product or service is right for you. You also need to do lots of homework to ensure that the sort of franchise you are intending to commit to is suitable for you. Factors such as the amount of capital required, the type and hours of work involved and the expected return are all important ingredients to consider.

You also need to consider why the visiting company executives are anxious to sell all the New Zealand territories within a week. They have come from overseas. They have no commitments here. They are showing you figures which may or may not be accurate, but you have no way of proving the accuracy. You are relying on their word that they are, in fact, doing well overseas. Meeting executives at a company hotel always gives the impression that such people are people of substance and, therefore, ought to be genuine. They may well be genuine, but there is also a real chance that they are merely conning you into parting with some money and then leaving the country.

Even if the company executives are genuine, you need to ask yourself what real research have they done about New Zealand and the market conditions here. What works well in, say, Australia or Canada or the United States does not necessarily work well here. Even within Australia, there are differences from state to state. Have these people really done their homework about conditions in New Zealand? Do they understand the demographic mix within the country, and have they undertaken any research as to the likely acceptance of their products within this country? These are all relevant questions to ask, and if it is apparent that the visiting executives are not able to readily answer such questions then alarm bells should be ringing.

Furthermore, you should not be committing yourself to a franchise without obtaining expert advice. You should engage a lawyer to look at the agreement. It may not have been adapted to comply with New Zealand law, or it may have unduly onerous provisions for you as a New Zealand franchisee. Critical to the introduction of a franchise from offshore is the element of contractual commitment from the offshore franchisor. That includes visits to New Zealand by representatives from the franchisor to assist the franchisee or franchisees get established. Some franchises from overseas have failed in New Zealand simply because there has been a lack of commitment. Remember that New Zealand is a small place and offshore franchisors will tend to concentrate on bigger markets where the returns are greater and where the problems are likely to be greater.

The role of an accountant is also essential. The city executives have shown you figures which you may well understand, but the critical analysis of an accountant is important to establish whether there is profit to be made from the franchise. Profitability in, say, the State of New South Wales, does not guarantee that profitability will occur locally. What works well in a dense population may be disastrous in a sparse population.

There is another very good reason why you should be wary about signing up on the spot. Any successful franchisor will want to make sure that the potential franchisee is a suitable candidate. It is impossible for a franchisor to assess the suitability of a potential franchisee in one or two meetings at a city hotel. The franchisor needs to know about your financial circumstances, your background, your ability to adapt to a system where there is a high level of compliance required on your part. Franchising is like a partnership in the sense that each of you is expected to have a long-term relationship and there must be a compatibility between you both.

Let's assume that the visiting company executives are genuine and that they have done their research about New Zealand market conditions and that they are offering a wonderful opportunity. If they are genuine, then ask them to produce an initial agreement which is conditional upon your lawyer and your accountant being satisfied with the franchise proposal. Pay a small deposit but ask that this be held by a local lawyer or accountant on trust for both sides on the basis that if the agreement does not proceed, then you recover your deposit. After all, if the franchisor is genuine, they will need to engage a local lawyer and accountant and, no doubt, set up banking facilities, etc.

All of these factors make it unlikely that a good franchise would put you under time pressure in the way that you describe. Forcing a hurried decision is not good franchising practice - indeed, it is worth remembering that the Code of Practice of the Franchise Association of New Zealand requires franchisors to allow franchisees a seven day cooling off period before such franchisees are committed to franchise agreements. Many good franchises have been introduced to New Zealand from overseas, often via local master franchisees, but only after much time, research and care has been put in on both sides. Make sure you have the time to take appropriate advice before making any commitment.

Rory MacDonald



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