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Buying a Franchise Business
Franchising is often described as being like a marriage – a long-term relationship where both parties must trust and respect one another.
When looking to buy a franchise business in New Zealand, you must first make yourself aware of the franchise sale process.
Franchising is often described as being like a marriage – a long-term relationship where both parties must trust and respect one another. Like a marriage, both parties need to be passionate about the benefit of the relationship, and get to know each other well before making that commitment.
You will want to ensure the franchisor is trustworthy, ethical, and professional - a person or company that you want to do business with. Equally the franchisor will want to check you out – selecting the right franchisees is one of the most important things a franchisor can do.
The Steps in Buying a Franchise Business
Firstly identify how much capital you have to invest to start your own business under the umbrella of an established brand. Your planning should include identifying the capital, skills, and resources you have available, industries that excite you, businesses that suit your lifestyle and family, and preferred locations.
2. Making Contact
With more than 300 franchises available in New Zealand there are a lot of opportunities to select from. To speed up the process your first call could be to LINK as we represent many franchise systems and in our initial meeting can assist you in identifying the types of franchises suited to your skills and finances. If you have a specific franchise you have already identified you want to find out more information about, then we would commence by sending you an information pack.
3. Information Pack
The information pack you receive will usually contain an introductory letter, a brochure, a confidentiality agreement and possibly an application form. The purpose of this pack is to give you a broad outline of the business and its track record - its products and services, history, and cost. It will often spell out the skills the franchisee needs, such as 'ability to motivate a team' or 'enjoys the outdoor life'. If after reviewing the information pack you like the business, your next step will be to complete the confidentiality agreement and schedule a meeting to discuss it in detail
4. Confidentiality Agreement
Completing the confidentiality agreement does not commit you in any way, it merely shows you are serious about investigating that franchise. Most franchisors will require you to sign this to confirm that you will not disclose information about their business to any third party other than your professional advisors. This protects the franchisor against commercially sensitive information falling into the hands of their competitors.
5. First Meeting
The first meeting is likely to be informal and will give you time to find out more about the franchise. If you are looking to go into business with a spouse or partner, it is important that they attend the meeting as well.
Prepare for this meeting by studying the information you have already and by finding out as much as you can about the franchise. If possible, visit several outlets as a customer, check out their website and watch out for advertising or news stories.
In return, you will be asked questions. The franchisor wants an 'overview' of you as a potential franchisee. They will ask about your relevant experience to understand what motivates you to consider buying this franchise. This first meeting should give you a clearer idea of whether this opportunity is the right 'fit' for you. If after this meeting you are interested in proceeding further, your next step will be to fill out and return the application form.
6. Application Form
The application form is not a formal contract and does not commit you to anything. Many potential franchisees are surprised by the number and personal nature of the questions in the application form – it is the franchisors way of ensuring you are serious. It will ask some standard questions such as your previous work and business experience, and referees. It may also ask some searching questions about any partners that may be involved and your financial position.
Why do they want this information? They need to ensure you have the funds and security to purchase the franchise, and working capital to get started. It is vital that full, honest and complete details are given to the franchisor so they can determine your chances of success.
Once your application has been received by the franchisor you can expect a further meeting. A good franchisor will take care to ensure you are given all the factual, detailed information you need to make your decision to buy the franchise or not. This generally takes the form of a prospectus ('disclosure document').
Franchisors are cautious about making projections about how profitable a new outlet will be. While some service franchises provide guaranteed income, it is important to realise that most franchisors cannot guarantee your business results. As a prospective purchaser you need an indication of sales, costs and potential return on your investment before making a decision. The disclosure document should contain enough financial information for you to evaluate the opportunity and formulate your own business plan.
Some franchisors will ask you to pay a deposit of perhaps several thousand dollars when you lodge your application, or before you receive the disclosure document. This is not uncommon, and is a technique used to identify those who are seriously interested. Any such deposit should be fully refundable if you decide not to purchase the franchise.
One of the most important things to check is whether the franchisor is a member of the Franchise Association of New Zealand - their documents must meet a certain standard and they are bound by their Code of Practice.
At this stage, you can also expect to be asked many more personal questions, in much the same way as you would in a job interview. Although you are not applying for a job, you and the franchisor are both determining whether you can work together in a franchise relationship over a period of time. Just as you have been evaluating the franchise, the franchisor will be evaluating you as a potential franchisee
Most small businesses involve some sales activity and require good communication. Franchisors are generally looking for someone who is a team player, can follow guidelines, and listen to advice, likes dealing with the public, customers and staff.
Some franchisors prefer that you have no previous experience in that type of business, so they can train you to use their system without any preconceived ideas. They want someone who is open-minded, logical, organised, and has attention to detail.
Franchising doesn't suit independently minded people. As a franchisee you exchange security, training, support and buying power for independence. A franchisor may limit what you can sell, opening hours and how you promote your business. Franchisors are looking for 'intrepreneurs' rather than 'entrepreneurs' – people who are prepared to work within the boundaries of a defined system and acknowledge that the franchisor has expert knowledge of the business, while having the drive and ambition to develop and build their own business.
Be reassured by a rigorous selection process – if your application is accepted you know you have a greater chance of success. A good franchisor wants to ascertain whether you have the ability to learn to operate the franchise.
9. Franchise Agreement
If both you and the franchisor are happy to proceed you should get a copy of the franchise agreement. This is the legal document that forms the framework for the franchise. It is a legally binding contract which defines the relationship, roles and obligations of the franchisor and franchisee. It is recommended that you seek professional legal advice before signing it.
10. Other Franchisees
The disclosure document should contain a list of existing franchisees and their contact details. Our advice is to phone and visit as many as possible, and ask them the same questions you asked the franchisor. By doing this you will get an overall picture. You will get a range of opinions. Ignore the extremes, and look at the overall picture. Does it live up to the franchisor's promise?
This is also the time to see how well developed the franchise systems are. Ask to see the manuals and a demonstration of software provided. You probably won't get to take them home, but you should be given the chance to look at them and see how comprehensive they are – after all the system is what you are buying.
11. Professional Advice
Once you're this far through the process you will have a clear picture of the franchise and whether you want to join it. Now is the time to seek professional advice – commercial, financial and legal.
On the financial front an accountant is needed to verify the financial information provided by the franchisor, and to help you formulate your business plan. If you are thinking about investing your hard-earned money in a franchise put those figures before an accountant.
You'll also need a lawyer to examine and explain the franchise agreement to you, use advisors who have experience in franchising – because not all do. Solicitors and accountants who are specialists in franchising can provide better advice than those who don't.
Don't expect your lawyer or accountant to approve or endorse your choice of franchise; they are paid to be cautious on your behalf and to point out potential pitfalls. Don't be too discouraged or back out of a franchise you are keen on until you've identified if the issues raised are real.
12. Make Your Decision
With a franchise you are not in business by yourself, but you are in business for yourself, and it will be your own business. By now you will have collected more information than most business buyers, and be well equipped to make an informed decision. Make your own decision based on your evaluation and risk assessment.
If you decide to proceed and purchase the franchise, and the franchisor accepts you as a suitable franchisee then you will be required to pay the franchise fee into a solicitor or brokers trust account to secure it. Any other payments will be required as per the schedule in the disclosure document.
Congratulations – you are now part of a franchise. Setting up and training for your new business can start! Welcome to the world of self-employment. There are few joys as great as running a profitable business with the support of the right franchisor, and we hope that you enjoy precisely that.
For Further Information about this article, contact your nearest LINK Business Broking office at: