Talk to the Franchisor and get as much information as possible about the franchise system. Refer to “Questions to ask the Franchisor” for a list of questions to ask the Franchisor.
Talk to existing franchisees and ask questions such as:
- How long did it take for you to earn a living income from the business?
- How many hours are you working a week?
- What is the franchisor like to deal with and what support do you receive in practice from the franchisor?
- How helpful are the manuals and training?
Engage the services of an accountant who specialises in providing advice to franchisees.
Engage the services of a Fortune Manning franchise lawyer.
Get your structure right – your accountant can help you decide which structure to use – company, trust, individual names etc
RESEARCH
Research the market:
- What is the current market for the goods and services being offered by this franchise?
- Do you see the demand for this product or service increasing in the near future?
- Is the demand for the goods or service economically sensitive so a downturn in the economy might decrease business?
- Who is the competition and how strong are they?
- How does the franchisor intend to grow demand for the product or service?
- Is the franchisor a member of the Franchise Association of New Zealand Inc.? Go to www.franchiseassociation.co.nz to find out.
Can you afford it?
Make sure you will have enough funds to fund the franchise purchase costs (including franchise fees, purchase of products and equipment, fit out costs, adviser costs (e.g. lawyers and accounts) and work capital. Speak to a bank who specialises in franchising.
Being a franchisee does not suit everyone. Ask yourself if you have what it takes to be a franchisee.
- Are you comfortable with the creative and other restrictions that go with following a franchise system and manual?
- Would you be comfortable with having to strictly comply with a manual or instructions from a franchisor?
- Are you willing to give up some of your independence? If you like to make all the decisions rather than follow directions then a franchise may not be right for you.
- Are you suited to the particular franchise you are interested in? For example, physically, by experience, temperament? Are you prepared to put in the dedication and plain hard work required?
- Are you adaptable and trainable? Are you happy with being told what and how to run your business and having to undergo training as required?
- Do you have the right skills and abilities for this particular type of business?
- Is it a good investment for you? Because you only have the right to conduct the franchise business for a limited period of time, it is vital to understand whether the purchase of the franchise meets your own investment requirements? Your accountant should be able to assist you in answering this question. Talk to other franchisees about how profitable the franchise is for them.
OBLIGATIONS
What are your obligations under the Franchise Agreement? The Franchise Agreement forms the base of your relationship with your franchisor. It is important that you understand your obligations as a breach could lead to termination of the agreement.
What are you getting? It is important that you understand exactly what you are getting when you purchase the franchise, for instance:
- How long is the initial term for?
- Are there any rights or renewal?
- What are the total upfront costs?
- What are the ongoing costs?
- What support can you expect to receive from the franchisor?
- Do you get an exclusive territory? If yes, in what circumstances can you lose your rights of exclusivity?
- What advertising is done by the franchisor?
- What supplier arrangements are in place? Are there any discounts or rebates which apply?
- Is there a manual? If so, how comprehensive is it?
- What happens when the agreement ends or the term expires? What happens to the lease? What non-competition restrictions will apply to you?
DUE DILIGENCE
Do your due diligence on your premises:
- What is the current rent and outgoings?
- What are the rent review provisions?
- What is the term of the lease?
- How long is there to go?
- Are there any rights of renewal?
- What are the lease arrangements?
- Do you enter into a lease directly with the landlord or do you enter into a sublease with the franchisor?
- Is the location suitable for the business?
- Is the business a permitted activity or is resource consent required?
- Is the intended business use a permitted?
- Is the use permitted under the lease?
- What licences do you need to operate the business from the premises (e.g. liquor licence, food premises licence)?
- Are there any developments in the area which could affect the trade of the business?
- If the landlord owns more than one shop, has he or will he covenant not to allow any of the other shops be used for the same purpose as your business?
- What rights does the Franchisor have in respect of the lease?
- What insurance do you need? Often the franchise agreement will require you to obtain certain types of cover and you should confirm this with the franchisor.
Do you understand that while the franchise model has proven generally to give you more of a chance of success than starting your own business from scratch, there is no guarantee that your franchise will be successful?
Have you done your due diligence on the Franchisor?
- Have you talked to other franchisees about their experience of the Franchisor?
- What experience do people behind the Franchisor have? How long have they been involved in this Franchise? In any other franchise?
- What rights does the Franchisor have to sell you the franchise: does the Franchisor own the system or operate under licence?
- Does the Franchisor have a good track record? How many franchises currently in existence? How many have been terminated?