FRANCHISING 101

Franchising has existed in some form or another in New Zealand since at least the 1960s, then the mid-1970s saw the arrival of McDonald’s and other fast-food brands, and New Zealand entrepreneurs followed. Companies such as Stirling Sports and Rodney Wayne led local franchise development in the 1980s, while many other systems were imported, often from Australia where franchising was really taking off.

While some succeeded, others proved to be either unsuited to the New Zealand market or under-developed – something which prospective franchisees still need to consider when looking at a new franchise. As always, using franchise-experienced legal and financial advisors is vital.

But it was in the 1990s that franchising really took off here, with the home services sector leading the way. They found a ready market among New Zealanders: being your own boss is a dream for many (see page 6), but getting started on your own is both tough and risky. Buying a ready-made business format, where there is a proven system to follow plus training and support on an ongoing basis, appealed to a lot of people. That’s still the case today, with many recent immigrants to New Zealand also appreciating the same benefits.

Is it safe?

Today, with over 540 franchise brands and almost 30,000 franchised units at last count, New Zealand has more franchises, and franchisees per capita than any other country in the world. Those franchises employ over 114,000 Kiwis. And franchising is also a major contributor to our economy – with a turnover of $73.4 billion in 2024, franchising accounts for 11% of New Zealand’s GDP.

Despite this success, though, many people still don’t understand what franchising is or how it works. There are still plenty of misconceptions out there and the fact that franchise brands are so well-known means that if something does go wrong – whether it’s something dodgy in the fried chicken or an individual franchisee going out of business – it tends to hit the headlines.

Generally, however, franchising is regarded as a much less risky way to go into business for yourself than trying to go it alone. That’s not to say that franchisees can’t fail sometimes – they can and do. But if you’re looking at buying a business, a good franchise system offers plenty of advantages.

The important thing is to choose one which suits your skills, your interests, your needs and your pocket, and then to check out the franchise thoroughly with the help of your advisors (you can find lots of help on how to do all this on this website). Remember, franchising has worked for many thousands of New Zealanders of all ages and all backgrounds. Could it work for you?

Why does it work?

Consider the duties of an independent lawnmowing operator. In an average day, they must answer the phone, visit potential clients, quote on new work, maintain equipment, arrange advertising, organise invoicing, organise the bookings, handle any queries, travel from job to job over a widely-spread area – oh, and mow lawns. Unfortunately, though, it is only for the last duty – mowing lawns – that they actually get paid.

Now consider how a lawnmowing franchise can streamline that system:

• Phone calls (and even quoting) are often handled by the franchisor.
• Equipment is selected by the franchisor and bought at favourable (bulk-buying) rates, and a maintenance schedule set out which has been proven to minimise breakdowns.
• The franchisee is trained in the most time-efficient ways to carry out common activities, rather than having to learn through trial and error.
• Well-researched advertising is arranged centrally, the budget is increased by the contributions of all the other franchisees, and an 0800 service, website and custom-designed apps are provided to increase customer response.
• Scheduling may be arranged by the franchisor, and invoicing handled centrally or via state-of-the-art systems that link into on-line accounting services to minimise paperwork.

In addition, the impact of all that marketing increases the amount of work available in any one area, enabling the franchisee to focus on more local customers and reduce the amount of time wasted travelling between jobs. The result is that the franchisee can spend more time actually mowing lawns – the money-making bit – than an independent contractor.

In this case, the franchise system has enough significant advantages to work.

The basics

1. What is franchising?

Franchising is a method of marketing and distribution whereby a company (called the franchisor) expands by granting a person or company (called the franchisee) the right to operate a copy of its business. The right will usually include the ability to use the name, the business system and the know-how of the franchisor, and is granted for a fixed term.

The franchisor usually gains their income from fees or product mark-ups paid by the franchisee. In return, they must provide a variety of services to encourage the continuing profitability and growth of the franchisee’s business. The franchisee pays to set up the business in their area (including, for example, property, leasing or equipment costs) and is the owner of their own business. They receive their income from successfully marketing a desirable product or service under a promotable brand name.

2. Is franchising reputable?

Franchising enables companies who have a good product or service to expand faster because they are using the capital, local knowledge and commitment of individuals who are in business for themselves. It gives those individuals the ability to go into business properly trained and equipped, with the security of a well-proven product and system behind them.

Franchising is a part of daily life in New Zealand. Many of our best-known brands are actually franchises: Lotto, The Coffee Club, FreshChoice, Quest, Liquorland, Pit Stop and, of course, McDonald’s.

3. Why buy a franchise?

When you buy a well-developed franchise, you should enjoy many advantages. These include:

Product or service - The franchisor has already proved that the market exists. Franchisees are not risking their money on a new idea.

System - The most efficient way of delivering the product or service has been developed and will be shared with the franchisee.

Equipment - Franchisees start with the best equipment for the job and only the equipment they need – often specially-designed or developed.

Suppliers - Bulk buying means franchisees benefit from lower prices and better service than independents.

Brand marketing - The company already has a name which attracts customers and makes marketing more effective.

Training - A franchisee can enter a brand new industry and be trained in how to run that specific business to best effect.

Support - The franchisor keeps a watchful eye on the progress of the business to help the franchisee grow at the right speed and avoid errors.

Research & development - While the franchisee focuses on customer service, the franchisor works on new products and techniques to ensure franchisees remain competitive.

4. Is it a fail-safe way to go into business?

No. Franchises may offer you a much greater chance of success than trying to go it alone, but no business venture is entirely without risk.

Franchises are not the same, any more than all shops are the same. Even within the same industry, each franchise will be set up differently. It will have different business systems, different cost structures, different support services for franchisees and, above all, different people – both as franchisors and franchisees.

If the franchise is properly structured, it is likely to be the individuals who make the difference. Common causes for franchisee failure include:

• Choosing a business for which they are not suited or equipped.
• Being under-capitalised from the start and unable to finance the growth of the business.
• Failing to take adequate legal and financial advice prior to purchase.
• Not following the franchise system.
• Taking too much money out of the business too soon.
• Being over-reliant on the franchisor rather than accepting that this is your business.
• Failure to act upon advice or make difficult decisions.

Franchisors can also make mistakes. The most serious ones which inexperienced franchisors make are:

• Being under-capitalised and unable to provide the necessary support.
• Not having properly developed and tested the systems.
• Not having a sustainable business structure which can provide a fair return for both franchisor and franchisee.
• Selecting the wrong location.
• Selecting the wrong franchisee.

That’s why, if you’re looking at buying a franchise, you need to choose carefully and take professional advice from a lawyer and an accountant who specialise in franchising. They may charge a little more than a non-specialist, but they’ll take less time, probably have experience of the franchise you are looking at, know what to look for and give better advice.

5. Is it for me?

Franchising does not suit everyone. It does involve taking a risk, not having the security of a regular income, and being responsible for your own business. Do not rely upon the franchisor to make you successful. The franchisor will help, but basically franchisees are given the tools – the product, the system, the brand and the training – to enable them to get on with the job. Remember to ask all the right questions.

Success is up to the individual. As every successful franchisee will tell you: you only get out of the business what you put into the business. Remember that golden rule and you could have a great future as a franchisee.

Franchising Terms

Franchising has its own jargon. Here are some of the key terms you may come across:

Franchisor – The owner of the business name, the trademark and goodwill, and the developer of the business system.

Franchisee – The party (individual or company) who is granted the right to use the franchisor’s name and product/service. Some franchisors prefer to call their franchisees ‘franchise owners’ or ‘franchise partners’. For reasons of clarity, we always use the term ‘franchisee’ in this magazine.

Master Franchisee – A national or regional person or company granted the right to recruit, train and/or support individual franchisees within a set territory as part of a ‘three-tier’ franchise system (find out more here).

Franchise Fee – The upfront one-off payment made by the franchisee for the above rights. Cost varies according to the value of the opportunity and awareness of the business name.

Royalty – Also called ‘ongoing fee’ or ‘management service fee’. Paid by the franchisee for support and ongoing services from the franchisor. Sometimes a regular flat charge, but often expressed as a percentage of turnover (not profit). Percentage varies, but 4-10% reasonably common.

Advertising Fee – Often required from all franchisees as a contribution to a consolidated advertising fund. Often expressed as a percentage of turnover. Sometimes split into national/group advertising and local promotion.

Franchise Agreement – Legal document which sets out the precise terms and conditions under which a franchise is granted.

Disclosure Document – A document provided to an intending franchisee which contains information about the way in which the franchise operates and sets out details of financial and legal obligations.