by Simon Lord
last updated 10/03/2020
Find The Right Franchise
by Simon Lord
last updated 10/03/2020
With hundreds of franchise opportunities to choose from, how do you choose one that's going to perform for you? Here's our road map to starting up in business
One of the questions that we are regularly asked is: ‘What’s the best franchise, then?’ Unfortunately, it’s not a question to which there is a simple answer. You see, there are hundreds of different kinds of franchises available today, some of them very good indeed, but no single one is the best. How do you compare a fast food business with a gym, or a courier franchise with a mortgage broker? You can’t - but you can work out which is the best for you.
There are lots of happy franchisees in different businesses, but there are some miserable franchisees around, too – even in good systems. They are miserable because they made the wrong choice for their own personality, their circumstances or their time of life. In this article, we’ll help you work out which is the best type of franchise for you and then show you how to select from the choices available.
There are ten key stages laid out in our ‘road map’. Some of them you may need to do more than once; many will overlap or take place at the same time. Follow the map and look up the other references it features, and you’ll end up in the right place for you.
1. Assess Your Own Position
The first thing you need to do is decide what sort of business you are looking for. You need to work out what would best suit you and what you would want from it. Consider:
What skills do you have – not just work skills but hobby and social skills? Are they transferable to a new career? Are you good with your hands? Good with people? Good with numbers? You want to look for a business where your skills will become real strengths. However, that doesn’t mean you have to have experience in the same industry – some 80% of franchises say ‘no experience required’ because they provide full training. It’s more important that you have the right aptitude and the right attitude.
Are you prepared for what self-employment means? Running your own business involves working harder than you have ever worked in your life, especially during the start-up phase. Are you willing to work long hours and weekends? Give up sporting commitments? Reduce your social life? In addition to actually doing the work itself, you’ll also need to handle admin, paperwork, maintenance, compliance and all sorts of other tasks. Does your family really understand this and have you got their total support? Without it, you’ll be putting yourself under constant stress and both the family and the business will suffer.
Do you prefer working by yourself or leading a team? Are you a ‘hands-on’ person or a ‘hands-off’ person? Are you a night owl or an early bird? If you’re an early riser, a late night pizza business isn’t for you. If you like a lie-in, you won’t enjoy being a baker.
Will you feel comfortable without a regular source of income? That salary won’t be automatically appearing in your bank account any more. Is it OK to put your house or savings on the line? Do you think positive without being over-optimistic? Do you respond to goals and deadlines?
2. Get The Money Right
The cost of buying into a franchise ranges from under $5000 to over $1 million. What matters is not how much you have to spend, but how much you – and your new business – can afford.
Most people require some sort of finance. Even today, banks will often lend up to 50% of the cost of any new franchise providing it stacks up as a good proposition, but they will require some sort of security. This is usually property. When calculating what you can afford to borrow, remember that it is the value of the equity in the house, and not the value of the house itself, against which the bank will lend. The bank will restrict borrowings to up to 80% of the registered valuation, so if you need to borrow, say, $100,000, you will need to have a registered valuation of at least $125,000 on your property with no mortgage. If you already have a mortgage of $50,000, you will need a valuation of at least $188,000 – and so on. You may also need to check on what your house is worth at today’s prices before you start looking. It’s better to be prepared.
Don’t borrow more than your business can repay – lack of capital kills a lot of businesses. Many franchises will insist on your having, say, 50% of the start-up costs in cash. Believe them – if they say you can’t afford their franchise, you can’t. They don’t want you to fail any more than you do.
Decide what your own goals are. If you operate them properly, most franchises should provide a fair wage for the hours you put in, a return on investment and a tax-free capital gain when you sell them. What do you realistically want to achieve in each of these areas? Can your chosen franchise deliver it?
Your business will not make money from day one – it may take several months or even longer to reach break-even. How long can you support yourself before you need to earn an income from it?
3. Learn About Franchising
Find out how franchising really works – particularly the unique relationship that exists between franchisees and franchisors. You will be appointed as a franchisee because you have the potential to succeed in a particular system, you’ll be given a proven product or service and then trained and supported as you grow – but you will succeed or fail on your own merits.
At the same time, you won’t have total control. You have to work with the restrictions the franchisor lays down: what you can sell, how you sell, when you sell it, ingredients you use, equipment you buy and so on. You will have to contribute to marketing campaigns and share information with others. If you can’t accept this, don’t buy a franchise.
In addition to this magazine, there are a lot of valuable articles on-line at www.franchise.co.nz. Most of the banks with specialist franchise departments have material available too.
4. Research the Industry
Although we divide franchises into 10 main industries, there is likely to be a franchise available in almost any industry that interests you. That’s good news – you’re going to be working hard so it’s important to enjoy what you do. Expect to be in the business for at least three-five years. Exiting earlier is possible, but not usually profitable.
Research your chosen industry well. Read the trade magazines and websites, talk to people in the business and find out the trends. How will new technology affect it? How big is the industry in New Zealand? Which franchises operate within it? Talk to them all. You’ll learn more that way and it’s important to find a company where you ‘fit’ and share the vision. If you don’t like the people, don’t buy the franchise.
If a franchise is targeting a niche part of the industry, is the niche big enough to sustain your business? Overseas franchises sometimes find that, because our population is so small, niche products are not viable.
5. Evaluate the Franchise
When you first contact the franchisor to find out more about their opportunity, they will probably ask you some basic questions over the phone or ask you to complete an initial form. Meetings and interviews are very time-consuming, so it is a good idea for both of you to see if you meet the basic criteria for a franchisee.
You should then receive some information and be invited to call them to arrange a meeting if you are interested. Read this information thoroughly, and note down the first impressions and any initial questions you have when you first read it. Smaller franchises, in particular, may not have glossy brochures to send you, but the information should at least be informative about the company’s history, the market for its products or service, the franchisee’s role, and the costs involved. Make sure you have digested all this before the first meeting.
You will probably have two or three interviews with the franchisor. Remember that these interviews are for the benefit of both parties. While the franchisor will want to assess your suitability as a franchisee, your purpose is to obtain the information you require to make a decision. Don’t be afraid to ask questions (see below).
As discussions progress, the information required by both parties will become more detailed. All good franchisors will provide a disclosure document that contains detailed information about the franchise and your own prospective business within it. You will probably be asked to sign a confidentiality agreement before receiving this, as it will contain information that the franchise would not want to publish to competitors. Such a document is a requirement if you are dealing with a member of the Franchise Association; non-members may also provide such a document, but it may not contain all the information required under the Association’s Code of Practice.
In addition to confirming the information contained within the disclosure document, carry out your own research into the franchise, the people involved, its history, the market it serves and the franchisee’s role. Read up everything you can in trade journals as well as in newspapers and the Internet. The latter can be very useful but it pays to check the quality and the date of information posted on the Internet as much is out of date or not relevant to New Zealand. If you come up with any queries, raise them direct with the franchisor.
6. Question the Franchisor
The greatest single source of information on any franchise system is going to be the franchisors themselves, so don’t hesitate to ask questions. Prepare for every meeting by making a list of the questions you want to ask, and write down the answers. Be prepared to say if you don’t understand anything - the better informed you are, the more likely it is you will make the right decision.
You will have many questions about the specific industry, product or service which the franchisor will no doubt answer. However, you should also think hard about the franchise itself.
To help you in this, Franchise New Zealand has a list of 250 Questions You Should Ask on our website at www.franchise.co.nz. The six most important areas to be covered may be summarised as:
- How long was the business running before it began to franchise, and how successful was it?
- How strong is the franchisor’s financial position?
- If the franchise is new (or new to New Zealand), was a pilot franchise run here and what were the results?
- How many franchises have been opened? Have any closed or changed hands? If so, why?
- How successful are existing franchisees?
- Does the franchisor provide the levels of training and support you will need? How?
7. Talk to Franchisees
The surest method of obtaining information about the performance of the franchise is to talk to franchisees who are already operating the business. You will get a realistic assessment from a franchisee of the return that can reasonably be expected on your investment; the hours of work you will need to put in; the amount of service and advice provided by the franchisor; the general atmosphere and image of the franchise; and the everyday experiences of a franchisee. See our list of suggested questions to ask franchisees.
You should also make sure that you choose the franchisees to talk to. Don’t just accept a list of ‘approved’ franchisees from the franchisor – they are hardly going to point you in the direction of people who have had bad experiences. Get a full list of franchisees and choose from that. It’s fair to tell the franchisor who you want to talk to, as they may need to let your chosen franchisees know in advance that you will be calling and that you are a genuine prospective colleague, not a competitor fishing for information.
8. Take Good Financial Advice
Franchisors are often reluctant to make financial projections lest they be viewed as ‘guarantees’. However, they should be able to provide you with figures based either upon the performance of an existing franchise or company-owned outlet, or with figures based upon an average of stores.
A few franchise systems do actually offer work or income guarantees that may be attractive to the newcomer. It is important to check what any guarantee actually includes, under what circumstances it is paid out and for how long it applies. Read more about guarantees.
Whether you are provided with projections or guarantees, get an accountant with experience of franchising to assess all figures. I stress that they should have franchising knowledge, as it is a specialist area and an inexperienced advisor may either miss or misunderstand some element. Experienced advisors will know what to look for.
Encourage your accountant to contact the franchisor direct with any queries, and to work together to prepare a budget and cash-flow analysis for the initial trading period. You will find these invaluable when applying to a bank for funds, as the bank will want to know not only that you have the security but also that you will be able to repay the interest on borrowing.
The franchisor will usually be able to offer guidelines on an appropriate balance of financing between borrowing, overdraft and leasing for this particular business. Do listen to this advice; many franchisees start off under-capitalised, and that can lead to problems no franchisor can resolve for them.
Some franchise systems have established links with particular banks who consequently know the business well. This may help your application, although any bank will still want to be reassured of your ability to repay any loan.
9. See A Specialist Lawyer
It is important to understand the nature of the franchise agreement, as this is the document on which your relationship with the franchisor is founded. Most franchise agreements are lengthy documents (40-60 pages), and are couched in legal language. However, this should not deter you from reading through it paragraph by paragraph and making notes of questions that arise (don’t try doing this all in one go, and definitely don’t try doing it in bed unless you are an insomniac!).
You must then get a lawyer to check over the franchise agreement. Issues may include: exclusivity; territory; term of the agreement and options on expiry; and performance criteria. If you don’t understand what you are getting into – what your obligations are and what the franchisor’s obligations are – then you could be in for some nasty surprises further down the track.
Use a lawyer with franchise experience - again, he or she will know what to look for and will be quicker. Lawyers inexperienced in franchising often waste their time - and your money - querying quite standard conditions. The Directory includes a list of franchise-experienced lawyers and accountants.
Do not sign anything until you have been through this process.
10. Check What You’re Paying For
Before you sign the agreement and write the cheque, make absolutely certain you know what the up-front franchise fee covers. It is likely to include at least the right to trade under the franchise’s name, the right to use the franchise system, initial training and all system manuals. It may also include a (possibly exclusive) territory. Note that these rights will only apply for the term of the agreement – often five or ten years – and may include a right of renewal. The term may be less, particularly where lease premises are involved.
If you change your mind or if you fail training, you may still be able to pull out within a certain ‘cooling-off’ period but the franchisor will probably be entitled to subtract their own costs before returning your money.
You must also ensure you have a clear understanding in writing of any ongoing fees which are payable. These may include a royalty or management fee, marketing or advertising contributions, ongoing training fees, accounting fees and others. It is important that you are aware of what fees are payable, how they are calculated and what they are for.
By ensuring that you have a clear understanding of your rights and obligations as a franchisee before you start your new business, you reduce the potential for misunderstandings and disappointments. The better informed you are, the better position you are in to make the right choice of opportunity. The result is that your journey to business ownership should involve fewer wrong turnings or missed connections and be easier, safer and happier for everyone.
Six golden rules to remember while you’re following the road map.
- Don’t buy the first franchise that appeals. Shop around and do comparisons.
- Be prepared to invest one hour of time in research for every $1000 that you are required to invest.
- Check out your chosen franchise fully.
- Take your time and make sure you are happy with the answers to all your questions.
- Be 100% certain before signing. It’s normal to be nervous but be sure this is what you really want to do.
- Take all the advice you can but accept that this is your decision. It’s just the first of many for which you will be totally responsible in running your own business.
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