What do franchise buyers want?

Earlier this year, Franchise New Zealand media got together with the experienced researchers at Franchize Consultants to explore the profile, expectations and decision-making journeys of prospective franchisees.

We surveyed visitors to the Franchise New Zealand website who had expressed serious interest in buying a franchise, or had already bought one. Thank you to everyone who responded – it was a lengthy online questionnaire with 29 questions, some of them quite intrusive, so it was a big commitment on their part. Here are some of the highlights from the results which we hope will help you, inspire you or reassure you as you start your own journey.

Why buy a franchised business?

The number one reason our respondents gave for buying a franchise is greater income and wealth-building potential, followed by better life balance.

Respondents identified lots of other good reasons, too: more security and stability; achieving a personal challenge; making a career change; having greater control; building something to pass on to the children; and more flexibility.

If you’re looking at buying a franchise, it’s important to know your primary motivation and to share your reasons with the franchisor to make sure that your preferred business can deliver what you want and that your expectations of time input, effort and potential return are aligned.

The benefits of franchising

While a sizable proportion of our respondents had previous business ownership experience, the three main benefits of buying a franchise as opposed to starting an independent business were seen as:

• Having a proven business model;
• Using an established and recognised brand name;
• Having start-up and ongoing support and training.

It’s worth noting that while larger or more-established franchises will often have more to offer in these areas, that doesn’t mean that smaller or newer franchise brands don’t have advantages, too – for example, a greater choice of available sites or more opportunity for growth. In either case, prospective buyers should take good professional advice from franchise specialists as part of their due diligence.

Where are you coming from?

We asked: What is your current situation, or was your situation prior to purchasing a franchise?

Most respondents are currently working, whether in full-time employment, part-time employment or some form of self-employment. A small proportion, around 10%, said that they are not working and are ready to invest.

This indicates that most potential franchise buyers will be actively comparing the pros and cons of their own employed situation with what a franchise may offer. Unemployment clearly isn’t a major driver at the moment, unlike some of the economic downturns in the past. Given current staff shortages in many industries, franchises therefore have to offer other compelling reasons for people to change tack.

Where will you go?

Geographically, the location of prospective franchisees mirrors the country’s population with 55% of the sample considering operating a franchise in Auckland, Bay of Plenty and Waikato. A further 17% are considering a franchise in Canterbury.

Bearing in mind the constant stories about people escaping Auckland, we asked: Did you move or would you consider moving to another region to take up the right franchise opportunity?

Half of the respondents indicated that they’d prefer to operate a franchise in the area where they live. Of the other half, 31% indicated they'd be willing to move for the right opportunity, and 17% were undecided.

If you are willing to move or able to choose where you live, there are many good reasons to look at opportunities around the country – see Where Do You Want to Be?

Who are you going into business with?

According to our survey, 30% of prospective franchisees are considering buying a franchise alone, while a high 60% are entering with someone else – either with their spouse/partner (39%), another family member (13%), a business partner (6%) or friend (2%).

The high 60% is really interesting. It means that the new franchisees will be a team with more skills and experience than a single individual, and may allow each partner to play to their strengths – for example, one may focus on customer relationships while the other handles operations. See more on this in Working Together.

Note also that some franchise models allow for the partner’s time to be variable, or to be phased in as the business becomes more established.

New or established?

A majority (58%) of prospective franchisees are open to either a greenfield (new) or resale (already established) franchise outlet, as indicated by the no preference and don’t know categories. For those that did know, however, you can see a leaning to an existing outlet or unit (25%) versus greenfield (16%).

Naturally, some people will prefer the greater certainty of an established operation, and be prepared to pay a premium for it. However, if you have the confidence and ability to start from scratch with the support of your chosen franchise behind you, a greenfield location does offer potentially greater growth and capital gain.

Investment and income expectations

A small 17% of prospective franchisees expect to make a loss or breakeven during the first year of their franchise operation, while most prospective franchisees (35%) expect to earn between $50,000-$99,999 in the first year.

Once established, 48% of prospective franchisees expect to earn at least $100,000 each year.

Whether these expectations are realistic or not will depend on a number of factors. Understanding the likely financial returns, particularly during the initial start-up period, is important during the due diligence process to ensure that buyers have realistic expectations and won’t get alarmed by initial losses or made over-confident by seeing the money come in. Consult a good accountant – preferably a franchise specialist – before purchasing the business (see Will It Make Money?).

Expected owner’s income (profit and wages) by investment levels 

As to how much prospective franchise buyers expect to earn, that varies according to the level of investment. In general, the higher the investment, the more you might expect to take out of the business, whether as profit or wages. That’s reflected in the following charts.

Remember, however, that there’s a third source of return on investment which comes from the eventual sale of the business. A well-run business within a respected franchise brand will generally be worth more on the market than an independent business.

Talking to franchises

Nearly three-quarters of prospective franchisees (74%) indicated they will talk to at least one existing franchisee in the system before making a final decision and 19% indicated they will talk to at least five.

Getting feedback from existing franchisees in the system should be an important part of the due diligence process; however, 26% of the prospective franchisee sample have indicated they would not be talking to any existing franchisees.

See 50 Questions to Ask Franchisees for more information on why existing franchisees are an important resource for any buyer.

Sources of advice

As you might expect, accountants and lawyers are the key sources of advice for prospective franchisees while bankers, consultants and business brokers are also consulted before the purchase.

Given the importance of the decision that any prospective business buyer is making, and the potential impact it will have on their family, their finances and their future, the figures of 70% for accountants and 63% for lawyers are a little disappointing. We would encourage all franchise buyers to take proper professional advice as part of their due diligence.

Key reservations about buying a franchise

We asked people what their biggest reservation was about buying a franchise. Not surprisingly, the most mentioned theme (by 36% of respondents) was the cost of the initial investment and funding. Here are some comments:

• "Cost of initial investment and funding" 
• “Cost to start”
• “Purchase price”
• “Financing the opportunity”
• “Paying for goodwill”
• “Increased barriers to get business funding from banks”

These concerns are understandable, which is another reason for getting good advice before making any decision about buying a franchise. Funding is available, but buyers need to make sure they have all the information they need before approaching a bank to improve the chance of getting what they need – see Seize the Moment.

Finally, one prospective franchisee made a comment that really stood out for us. They summed up their biggest reservation as, ‘I lack business experience. I’m worried about not running a good business, although I’m pretty good with money.’

Frankly, they sound like the ideal candidate for buying a franchise and getting all the systems and support they need. Their awareness of their lack of experience is a real positive if it leads them to ask good questions and get all the advice they need before making a decision.

About the survey

The online survey was conducted between May and August 2022 using a database of individuals who had indicated interest in purchasing a franchise opportunity using the Franchise New Zealand website. It comprised 29 questions covering a range of areas including motivations and appeal, interests and preference, investment and income expectations, the research and decision-making journey and respondent demographics.

All information received from the 173 respondents was treated in strictest confidence and anonymised for the purposes of reporting.

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