WHO MAKES THE MONEY?

The basic principle behind franchising is that someone develops a business format and an operating system with some advantages over other existing businesses in the market. By franchising, this person (called the franchisor) then replicates or clones his or her business in other geographic areas by granting the right to another (the franchisee) to operate the same business system under the same name, usually for a fixed and potentially renewable term.

The franchisor gains income from an initial fee paid by the franchisee to gain access to the franchise brand, training and systems, and from ongoing fees or royalties paid by the franchisee. In return, the franchisor must provide a variety of services to encourage the continuing profitability and growth of the franchisee’s business. The franchisee receives their income from marketing a desirable product or service under a desirable brand name.

This basic approach, called business format franchising, has proved to be the most dynamic form of marketing and distribution in the world over the past 70-plus years.

But one of the most common questions raised by anyone contemplating buying a franchise is: Who really makes the money – the franchisee or the franchisor?

Understandably, in the tougher economic times currently being experienced in this country, there’s even more reason to raise this question.

Some people might suggest that it’s the franchisor who’s getting the main financial benefit. Anecdotally that is often the perception, and misconception, whenever the subject of a conversation turns to franchise businesses.

The simple truth is, while a franchise business won’t necessarily make you totally immune from economic downturns, it does mean that you have a fully supportive system behind you, managed by the franchisor, whose priority is to do their best to keep you making money and enjoying success, no matter what state the economy is in.

The franchise relationship

Philip Morrison of Franchise Accountants, who has worked with over 1000 potential buyers evaluating over 250 different franchise systems, describes a franchise business as an interdependent symbiotic relationship – one in which the franchisor is ‘senior partner’ and each franchisee is a ‘junior partner’.

He says the reason why people may think it’s the franchisor making all the money, is often a lack of understanding around how the franchise model works, and a belief that there isn’t parity in the relationship.

“If a franchisee believes his business is not living up to expectations regarding income, then the first thing to do is have a serious chat with the franchisor,” suggests Philip.

Being transparent

Caro Wedding is in a good place to judge who makes the money: she sits in the middle of the franchisor-franchisee relationship as a regional master franchisee for CrestClean West Auckland and North Shore. Caro, who is also winner of the 2024 Westpac New Zealand Franchise Awards Regional Master Franchisee of the Year, agrees that it’s important to talk to the franchisor team about any aspect of income. “Be as transparent as possible if you have concerns about your business’ income.”

As a regional master franchisee, Caro manages many of the tasks of the franchisor in her area, increasing efficiency and reducing costs for the franchise system. With master franchising, franchisees typically pay their initial fee and ongoing royalties to the master franchisee, who in turn pays a proportion of these fees to the franchisor. Unlike multi-level marketing schemes, the ‘chain’ stops there - the role of the franchisee is to deliver the product or service successfully and profitably, not to recruit additional franchisees.

Caro explains that when talking to potential new franchisees she always provides transparency around financial gain, costs and fees. “Because many of our franchisees start off with a part-time business as a secondary income for their families, we do recommend they work towards becoming a full-time franchise, as this will be where they can step into specialised work which is more profitable.

“Often, financial success comes down to mindset,” she adds. “Putting the customer first and recognising that it’s the little things and personal relationships that make the difference.”

Buying a franchise purely for financial gain is not advisable either, as running a business provides challenges and benefits beyond the associated income.

“Obviously financial freedom will be a natural outcome of all the other good habits and professionalism conducted within your franchise business,” says Caro, “and we encourage franchisees to develop business plans with which they can grow and flourish over time.”

Goal setting is vital too, she believes. “For example, around 70% of our franchisees have the goal of home ownership, and many progress beyond that to purchasing rental properties.”

Franchisors make more: fact or fiction?

So, with strong goals and a business plan, and a good system behind them, the franchisee should make money – but since they are collecting all those fees from franchisees, won’t the franchisor just make more?

Dr Callum Floyd of system development specialists Franchize Consultants says a well-structured franchisor with near full-market penetration and a substantial network of franchisees will almost certainly be making more money than franchisees running an individual franchise unit.

“You should be concerned if that wasn’t the case,” says Callum, “as franchisees will want to know that their franchisor is also successful financially and therefore has the capacity to provide great support, as well as innovate and invest in the future.

“If a mature franchisor (operating for 10 years or more) is not making much, but franchisees are, then I’d be concerned that the model hasn’t been developed properly.

“However, it needs to be said that in many franchise networks some individual franchisees make a substantial return in terms of profit and return on investment (ROI) and there are circumstances where this may indeed exceed how much profit the franchisor makes.”

He says this may be the case where some franchisees own, develop and successfully run multiple outlets – “for example, in the case of McDonald’s restaurants where franchisees may own three, four or even more than ten outlets producing highly profitable revenues.”

When shopping for a franchise, advises Callum, look at the unit level economics and consider whether a similar investment and ROI interests you. As part of your due diligence before buying a franchised business, ask lots of financial questions about the business you are buying, the other franchises operating in the business and the financial performance of the franchise system itself. (See 250 Questions to Ask a Franchisor).

A system can’t be successful long term unless both franchisor and franchisees are making money. “I’d want, as a franchisee, my franchisor making more than me so they can invest in innovation and a future beyond what an individual successful outlet would do,” explains Callum. “Otherwise, it’s hard to see what the network benefits would be.”

He believes it’s similar to the power of a group marketing fund, which allows a franchise company to promote the brand better and more efficiently than what an individual can do. James Cash, a young Manawatū-based V.I.P. Lawns and Garen Care franchisee, found V.I.P.’s brand power and marketing programmes invaluable in helping him rapidly grow his new franchise business.

And Callum Floyd says, “A healthy level of franchisor profit should provide similar network benefits – although you’d want to know what franchisors are spending their profit on; what innovations they’ve invested in historically; and, if they’re able to disclose it, what’s planned ahead.

“Certainly, a franchisor who reinvests in the business model would be the better franchise network to join, compared to one who uses the funds to invest in a holiday bach, for example.”

The importance of due diligence

New Zealand’s business landscape has been somewhat rocky in recent months, with economic headwinds providing a challenge for many Kiwi businesses. Franchised businesses are affected by the ebbs and flows of the overall economy, just as non-franchised businesses are.

Fortunately, franchised businesses enjoy a number of benefits such as stronger brands, more buying power, high-profile marketing and streamlined systems – all of which can deliver a more competitive offer and business model – even after taking royalties into account.

But Philip Morrison warns that potential franchisees must do their due diligence before buying – “Don’t rely on the fact that the business is a franchise,” says Philip. “Preferably this means familiarising yourself with and comparing different business models, investment levels and potential returns including cashflow and working capital requirements.

“A potential buyer must also have sufficient capital for each particular opportunity they are considering, as it’s very important to break even (that is, the point when the business makes enough revenue to cover its total costs) as soon as possible,” says Philip.

Another research tip for people interested in buying a franchise is to first complete the Franchise Association of New Zealand (FANZ) pre-entry programme for potential franchisees. It costs nothing and has modules explaining franchising, information to determine if franchising is a good fit, the benefits of buying from a FANZ member, and the importance of obtaining sound legal and accounting advice.

The programme also highlights how important it is to talk to existing franchisees and ask the correct questions (see 50 Questions To Ask Franchisees).

One question to ask yourself is: would you be capable of handling everything needed to run the business you have in mind? Think about having to drive local marketing, build the brand’s reputation and local referrals, execute a sales process, deliver a great product or service, and run the books.

Just because it’s a franchise doesn’t mean everything’s done for you. There are a lot of moving parts to monitor, and today more than ever before, it’s important to not underestimate the skill and energy required to run a franchise business.

Are you a good match? What's The Best Franchise For You?

The true meaning of support

Taking everything you’ve read so far into account, you may already be convinced that a franchise business is the way forward for you. There is, of course, much more to weigh up before taking that first step. On top of factors like fees, agreements, manuals and training, and the franchise model itself, there must be first-class business and franchisee-focused individualised support, which can be a heavy investment for a franchisor.

So, what does the initial training and launch support look like?

Callum Floyd highlights the importance of more dedicated franchise support during, for example, the first three to six months. There should be regular check-ins to, among other things, build out best practice, update plans, and instil additional confidence.

“From there, I’d be looking for a franchisor who has a formalised and educated support plan that they can explain to you,” he says, “so you know that the ongoing interest and support is there.”

Franchisees  can take full advantage of the opportunities that are available when a franchise system is dedicated to providing a path to self-improvement and business growth for their franchisees.

It is advisable for franchisors to request an initial and ongoing business plan from franchisees and to orientate their support around that, suggests Callum. He believes franchisors should also be keen for real-time access to a franchisee’s financial accounts, and there should be a business management system that lets them see how each franchise is performing.

Ideally, key metrics are shared too, to allow benchmarking and learning – one of the benefits of joining a franchise system is that good measurement and sharing across non-competing businesses helps under-performing franchisees learn from the star performers.

“Some franchisees worry about their franchisor knowing how much they make,” says Callum, “but I always say, as a franchisee I’d be more worried about a franchisor who doesn’t ask that question.”

Looking back to the future

Returning to the question raised at the beginning of this story, the matter of ‘who makes the money’ in a typical franchise business, the simple answer is that it’s both the franchisee and franchisor.

Simon Lord, founder and former editor of Franchise New Zealand, says that it should be both franchisor and franchisee who receive fair returns from a franchise business.

“When somebody says to me the only one who makes money out of a franchise is the franchisor, I reply that I’ve met many highly successful franchisees over the years, and I’m pretty convinced that there are actually franchisees out there making more money than their franchisor.”

Often, the highest performing franchisees in any system are the ones actively looking to improve their businesses further, with the backing of the franchisor, Simon explains. “They’re the people who work within the franchise system with the attitude of making something more of it.

“They’re making the most of the system they’ve joined and asking, ‘How does our measurement of how we’re doing on all of these indicators compare with the average within the system, and how can we do better on each of those measurements?’”

Successful franchisees are actively tracking their figures and constantly looking for ways to improve on them.

All franchisees are also encouraged to work ‘on’ their business, not just ‘in’ their business, says Simon. “That’s not about looking outside the system but rather looking for incremental improvements that all add up to a lot of large improvements and then sharing that information back with the franchisor and the whole system.”

He knows of one franchisee who implements profit-sharing with staff twice a year, whenever targets have been exceeded. This results in a high level of staff retention, which is essentially valuable to any business, big or small.

The key to the ongoing financial success of any franchise simply comes down to how it’s structured. And for it to be properly structured there must be benefits for both parties – franchisee and franchisor.

A marriage of mutual benefit

Nobody would question the fact that taking on a franchise business requires a variety of people skills. People liken it to a marriage – but, suggests Simon, “It’s more like a polygamous marriage.

“The franchisor must keep all their franchisees happy, and you’ve got to remember that all those franchisee ‘partners’ are at different stages of the relationship at any one time. In the case of a brand-new franchisee, initially the focus is on teaching them the basics and helping them to navigate any initial challenges.

“On the other hand, a franchisee who has been successfully managing their franchise for, say, ten years, and is making a healthy income, may be sitting in a comfort zone wasting opportunities – and dare we say it, be bored with their situation.

“That’s when the magic of franchising again shines through. An intuitive franchisor will encourage that person to use their experience to get more involved in helping others. Motivation comes not just through income, but also through recognition, and the satisfaction of helping others.”

Simone and Jeremy Palmer, co-owners of Coffee Culture cafés in Christchurch’s Merivale and Beckenham, are franchisees who are embodying this ethos – 15 years into their franchising journey they are finding new inspiration by helping young people into the business and training them up to become the next generation of franchisees.

Making a return on investment

As Callum Floyd says, “The franchisor might make more money than the franchisee, but they certainly won’t be the only ones making money. A good operator in a good franchise system will mostly achieve a fair - sometimes excellent - return on their investment and hard work. If they couldn’t, franchising wouldn’t be the huge success that it is.”

The independently conducted 2024 Franchising New Zealand survey found there are over 29,000 franchisees in New Zealand. According to Philip Morrison, that number is almost certainly growing. “Although New Zealand’s economy is currently running slow, the franchise market is running hot. People are seeking income and job security in a tightening job market, as well as increased household income,” reports Philip, “and there are many active buyers seeking franchise opportunities.”

Simon Lord believes that in terms of return on investment, the scorecard is probably fairly even between franchisors and franchisees.

“A new franchisor usually takes a much bigger risk initially than a franchisee,” says Simon, “because the franchisor would have already spent a minimum of six figures in setting up the franchise before the first franchisee is even appointed.

“Then after appointing each new franchisee, there are still considerable costs associated with training and setting up that person. The ongoing royalty fees are set to keep pace with the ongoing support provided to each franchisee and will generally be earmarked to pay for brand and system developments, and time spent working with the franchisees on improving their businesses.

“It may be quite a few years before the franchisor actually starts to see a positive net return on their initial investment.”

A franchisee has the advantage of buying into a business that is generally set up to make money right away, with the support of the franchisor to ensure that happens as quickly as possible. As Caro Wedding pointed out, a franchisee should have a business plan that clearly sets out their financial goals and milestones, provides a liveable income along the way, and has an exit plan in place to maximise their return on investment.

If the business provides sufficient income to achieve each of those goals, then the franchisee can be satisfied that they are indeed, making the money!

This article was first published in the Spring 2025 (Year 34 Issue 3) issue of Franchise New Zealand magazine.

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