Buying a Franchise

A major obligation on the part of a franchisee is the recognition that the intellectual property in the system itself, the know-how, the trademarks and trade names, the manuals and other key features all belong to the franchisor.  What the franchisee gets from the franchisor is a licence to use all that intellectual property for the term of the franchise. 

The agreement will spell out the financial obligations on the part of the franchisee such as the initial up-front payment, the payment of ongoing royalties and marketing fees and for some franchise systems an obligation to purchase either from the franchisor or from nominated suppliers. If the franchise relates to retail premises then there may be an obligation to require the franchisee to have adequate funding in place prior to the commencement date and to ensure that a fit-out of premises is completed by that date.  Obligations on the part of the franchisee include a requirement for initial as well as ongoing training, following the manuals issued to the franchisee (which can be changed from time to time), ensuring that key staff are adequately trained, maintaining high standards, opening the business for not less than minimum hours, undertaking local marketing, attending meetings arranged by the franchisor for all of the franchisees, supplying regular reports to the franchisor, working full-time at the business, observing confidentiality etc.  The agreement should be tough but fair.  It should not create obligations on the franchisee which are unrealistic, but it should spell out clearly that the franchisor is in control of the system and the franchisees forming that system are expected to 'toe-the line'. If, for example, there is a franchise with 10 franchisees and 1 franchisee blatantly disregards the system, then this can cause problems to the other 9 franchisees by way of bad publicity or simply a general disruption within the system, and obviously in those circumstances, the franchisor needs to have the legal power to fix the problem smartly for the good of the system.

There are plenty of well-run franchise systems where basically the agreement is signed and it is carefully filed away and seldom referred to again by either the franchisor or the franchisee, simply because both sides understand their respective roles and a high degree of mutual trust and cooperation exists.

Be wary of franchise agreements which are very light on the obligations of the franchisor.  It is an indication that the franchisor is not committed to a true franchise process, and unfortunately, there are some systems in New Zealand which are exploitive of the franchisees.  To my mind, these are not true franchise systems and from my observation, they do not last long.  One way to safeguard against the possibility that the franchise system you are contemplating may not be particularly good is to telephone at random existing franchisees and ask for their experiences.  Obviously, if they advise you that they have good relationships with the franchisor and they are making good money, then you should be encouraged to continue with the enquiry process. There are many dedicated and conscientious franchisors in New Zealand who do their very best for their franchisees which, after all, makes sense because a successful franchise system will benefit the franchisor in terms of financial worth.

No franchise system is trouble-free, and there will be times when tensions can develop between a franchisor and a franchisee, but good levels of communication and a willingness to be open and honest with each other goes a long way to resolving these problems.

I recommend that before you sign a franchise agreement you engage a lawyer who can give you a written summary of the key features of the agreement, but you must also read the agreement yourself and then discuss the agreement with your lawyer in respect to any aspects that concern you.  Ideally, the lawyer who reviews the agreement should be a person who understands how franchising works in general and is familiar with franchise agreements. Attached is a summary of the typical clauses to be found in a franchise agreement.

Other matters to consider in respect to the franchise agreement relate to the right structure  in which to enter into the franchise.  In many cases a company is the best method, but this is a matter that should be discussed both with your lawyer and your accountant.  If you use a company, then expect to give individual guarantees.  The formation of a family trust may be appropriate to provide some measure of protection in the unlikely event that the franchise fails or possibly a claim is brought against the franchisee by a disgruntled customer.  Setting up the best banking arrangement is also important. The 3 banks that feature prominently in franchising are the National Bank, Westpac Bank and ANZ Bank.  Each of these banks has specialist banking divisions and quite often can offer a more attractive lending proposition than can be obtained elsewhere.

Leases of premises may need to be considered for retail type franchises.  Some franchisors take a head lease with a sub-lease to the franchisee.  Other franchisors require the lease to be directly to the franchisee with provisions in the franchise agreement which control what the franchisee can and can't do with the lease.

It is important to get all the legal work out of the way before the franchise commences.  Once you are underway as a franchisee, you will be devoting your whole energy to making the franchise work successfully.  A clear understanding of the legal obligations and the legal structure that you have utilised is obviously important. Simple things like updating your wills and perhaps creating enduring powers of attorney are included in the mix of matters that should be addressed before you get under way with your franchise.

I am happy to report that most of the franchisees for whom I act tell me some months later that they are happy with the decision they have made.  There are always a few who find that franchising simply does not suit them, but again in a well-run franchise operation, the franchisor should be cooperative in allowing these people to sell-on their businesses to other franchisees.  All good franchise agreements will contain specific provisions as to the process for selling a franchise business and remember that the term of the franchise should be such as to allow a franchisee to sell, say after 4 years knowing that the incoming franchisee will have rights of renewal under the agreement. Sales of franchises are not uncommon as people move on to other opportunities.  One of the advantages of franchising is that there is more likely to be willing buyers for a well run franchise system.