Franchising is exciting and is a method of marketing goods and services. The franchisor owns the name, idea, secret process or piece of equipment together with the goodwill and know-how associated with it. The franchisor grants a licence or franchise to another person called the franchisee and that person can use the name, idea and process but a franchise agreement must be signed.
Franchises can involve transactions between manufacturers and wholesalers, manufacturers and retailers, wholesalers and retailers, and retailers and retailers.
What should you consider when buying a franchise? You must meet with the franchisor and find out the company’s financial health and history, whether training is an extra cost, the total cost of taking up the franchise, the long term viability of the product or service, whether there is an exclusive territory and what that means, types and amounts of advertising support, the need or otherwise to buy products from the franchisor, realistic profit and loss figures, open end restrictions, and royalty payments.
For a new or Greenfields franchise, you will have to pay upfront franchise fee. If you are buying a second-hand franchise from a franchisee who wishes to sell, then there would be a goodwill component payable to the seller as well as stock and equipment costs.
You must consider the ongoing costs. For example, you will have to pay a percentage of gross sales by way of royalty to the franchisor, a percentage of gross sales for marketing, local advertising and most likely purchase the products.
You must request a copy of the franchise disclosure document which will provide key information including the business experience and personal background of the directors, the franchisor’s track record, description of the franchise, the initial investment required, any other payments due to the franchisor, restrictions on the franchisee’s conduct of business, a level of franchisee’s personal participation, the number of existing franchisees and their success rates, the franchisor’s right to select or approve sites, training and support guaranteed to the franchisee, financial data on the franchisor, current number of franchisees, the value and appeal of the product or service, and the renewal/termination terms.
You will be asked to sign a franchisee agreement. This will set out your rights to sell or transfer ownership of the franchise in the future, a description of your heirs’ rights in the event of your death, the geographical area and types of customers to whom you may sell, the nature and extent of your obligations to the franchisor, including buying supplies and services, the right to renew or extend the contract beyond the original term, terms and conditions under which you may terminate the contract, description of exact training and support the franchisor must provide, precise definition of price, commissions, rental fees, leases needed to own and operate the franchise, and the precise boundaries of the territory awarded to you.
In conclusion, franchise is exciting but you must be very careful to choose an appropriate system, ascertain all of the fees payable and, most importantly, talk to at least 5 or 6 existing franchisees about the support and professionalism of the franchisor.
Stewart Germann founded Stewart Germann Law Office (SGL) in 1993 as a boutique law firm at Auckland, New Zealand, specialising in franchising, licensing and business law. Stewart has over 40 years’ experience in franchising law and acts for franchisors in New Zealand, Australia, USA and the UK. SGL also act for franchisees and provides legal advice. Stewart has spoken at franchising conferences in New Zealand, Australia, Italy, South Korea and USA and he was on the Board of the Supplier Forum of the International Franchise Association (“IFA”) for 6 years until March 2007. Email: stewart@germann.co.nz | Web: www.germann.co.nz