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News
So, you want to buy a franchise...
Wednesday, 12 August 2009
A franchise is defined as “A licence granted by the franchisor to operate a particular business using the franchisor’s name, where the franchisor provides assistance to the franchisee, exercises continuing control and receives periodic financial consideration from the franchisee for the services provided.”
Few people know that the Singer Sewing Machine Company developed the first modern franchise in the 1860s.
Although most of us are familiar with fast food franchises such as MacDonalds few of us know the first modern franchise was developed by the Singer Sewing Machine Company in the United States in the 1860s.
International comparisons show franchising is the fastest growing form of retailing with 50% of merchandising sales in the United States attributable to franchised businesses.
In New Zealand the figure is around 15% with a growth rate of around 25% per annum.
Things to think about if you want to become a franchisor:
- Are you honest?
- Do you have a strong sense of ethics?
- Are you financially stable?
- Have you tested your potential franchise format in the market conditions into which your franchisees are likely to trade?
- Is your package complete and ready for franchisees to run with?
- Are the costs manageable and the returns worthwhile to both you and potential franchisees?
Things to think about if you want to become a franchisee:
- Are you ready to commit to the franchise business for the next 5-10 years?
- Do you have the tenacity and persistence to succeed?
- Are you a team player and are you prepared to follow a system?
- Are you financially stable?
- Do you know your territory
- Do your personal / business goals suit franchising?
The Franchise Agreement sets out the contractual position between the Franchisor and the Franchisee.
Things to include in your agreement:
- Be very clear about what the Franchisor allows the franchisee to do.
- How long is the franchise granted for and are there renewals of the term?
- What obligations does each party have?
- Where can the franchisee operate?
- Is the franchise agreement exclusive or non-exclusive?
- What payments are required and when are they to be paid to the Franchisor?
- Does the Franchisor require the franchisee to perform to a given budget?
- What training does the Franchisor provide? Who pays for it?
- Operations Manual, the franchise agreement usually requires the franchisee to adhere to the Operations Manual.
- Transfer / assignment, how is this done, what restrictions are imposed?
- Non-Competition / Restraint of Trade, what provisions apply, are they enforceable?
A few danger signals to be aware of:
- No franchise package.
- Inexperienced franchisor.
- Is the franchisor hoping to subfranchise to finance ‘Master’ franchise?
- No reasonable profit to the Franchisee.
- Estimated profits and success stories which cannot be substantiated.
- Promises of being able to get rich quick with little work.
- A non refundable deposit is required in order to get a copy of the agreement.
- Not being allowed investigate the ‘system’ prior to signing the franchise agreement.
- A confidential Operations Manual” which will not be disclosed even if a confidentiality agreement is signed?
- Refusal to disclose financial details.
- Non disclosure of details of other franchisees.
