The pre-franchise sleuthing zone for prospective franchisees

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There are many franchise businesses in New Zealand. For a potential franchisee, it’s comforting to step into business with someone holding your hand. On the downside, it is not exclusively your business and never will be.

As a purchaser, the key is finding a franchise opportunity with a fair and reasonable franchisor that has a strong track record and positive plans for the future. Research before you buy-in is crucial, and the good news is there’s a lot you can find out for yourself.

Here are some pre-lawyer sleuthing ideas to help you get a feel for what the franchise is like before coming to your lawyer for a formal review of the franchise agreement.

  • What’s the website like? Is it sassy, sharp and jazzy? Or are there lots of spelling mistakes? Is it looking tired and like very little energy has been put into it? When you googled it, what else came up in the search? Good things? Bad things?
  • Who are the directors of the company selling and/or the head franchisor company? Google them. What comes up? Search them on the companies’ office website. This is free. Have they been directors in various companies? How long have they been a director for this company? Have they been struck off the register before?
  • Have you talked to the other franchisees? What are their dealings like with the franchisor? Are they happy and it’s all working well? Or are they disgruntled and have negative things to say? Is there more than one franchisee? Talk to them all. If you are buying from an out-going franchisee, ask why they are selling.
  • What is the seller claiming you will get when you buy this franchise? Does it sound too good to be true? You will likely find when you talk to your lawyer that the franchise agreement is worded strongly in the franchisor’s favour and that you will have very little rights and remedies available to you.
  • Can you get a feel for the reputation of the franchise? Do your friends and family know of them? Are you hearing their ads on the radio? Is the franchisor doing a lot of marketing in your area that you are aware of?
  • What is the industry? If you google the key words for the service/product that the business provides, what other businesses out there doing the same thing? How will you establish a point of difference and ensure that the business going to those other companies then comes to you? i.e. what is so great about this product?
  • Check the figures with your accountant. The accounts and the future projections are a key component once you decide to look into things further (and before you commit!). Your accountant can do things like: help you review financial statements, advise on all the “hidden” costs in the agreement as well as royalty fees you will be paying to the franchisor. Will you be able to pay yourself a salary? Do you have enough money to get this business to the profitable stage? When will be business realistically make a profit? They can also form a company for you and discuss your trading entity if you start getting serious.

The research suggested here is a good sense check before you ask for a legal review. Be aware that the documents don’t always reflect all the promises the franchisor has made verbally.

Buying a franchise can be a great way to get into business – as long as you go in with your eyes wide open. Our legal business experts will review your documents and help you negotiate the terms of your franchise arrangement to make sure there are no surprises.

This article was first published in November 2017 and updated in June 2019.

Our thanks to Rosie Allen for writing this article