Overseas franchise systems, rushing into a franchise agreement

Entering into deals that are made in a hurry can be a recipe for disaster. Approach any franchisor with caution as you would with any prospective business vendor. You need to resarch the franchisor and feel comfortable with that franchisor. You need to understand the products or the services that the franchisor is promoting, and know that selling or promoting that product or service is right for you.   You need to do lots of homework to ensure that the sort of franchise you are intending to commit to is suitable for you. Factors such as the amount of capital required, the type of work involved, the hours of work involvement and the expected return are all important ingredients to consider.

Unfortunately, there are people who are only too willing to take advantage of enthusiastic potential franchisees and to cheat them. You need to consider why the company executives are anxious to sell franchises within a quick time frame. Especially in new (unproven) or overseas origin franchise systems.  They are showing you figures which may or may not be accurate, but you have no way of proving the accuracy.   You are relying on their word that the concept will work, or is already doing well overseas.

Even if the franchisor executives are genuine, you need to ask yourself what real research have they done about New Zealand  and the market conditions here. What works well in, say, Australia or Canada or the United States, does not necessarily work well here. Even within Australia, there are differences from State to State. Have these people really done their homework about conditions in New Zealand? Do they understand the demographic mix within the country, and have they undertaken any research as to the likely acceptance of their products within this country? These are all relevant questions to ask and if they are not able to readily answer such questions, then alarm bells should be ringing.

You should never commit yourself to a franchise without obtaining expert advice. You should engage a lawyer to look at the agreement. It may not have been adapted to comply with New Zealand law, or it may have unduly onerous provisions for you as a New Zealand franchisee. Critical to the introduction of a franchise from offshore is the element of contractual commitment from the offshore franchisor. That includes visits to New Zealand by representatives from the franchisor to assist the franchisee or franchisees get established. Some franchises from overseas have failed in New Zealand simply because there has been a lack of commitment. Remember that New Zealand is a small place and offshore franchisors will tend to concentrate on bigger markets where the returns are greater and where the problems are likely to be greater.

The role of an accountant is also essential. The the critical analysis of an accountant is important to establish whether there is profit to be made from the franchise. Profitability in, say, the State of New South Wales, does not guarantee that profitability will occur locally. When you go outside Auckland the population density changes remarkably and what works well in a dense population may be disastrous in a sparse population.

There is another very good reason why you should be wary about signing up on the spot. Any successful franchisor will want to make sure that the potential franchisee is a suitable candidate. It is impossible for a franchisor to assess the suitability of a potential franchisee in one or two meetings . The franchisor needs to know about your financial circumstances, your background, your ability to adapt to a system where there is a high level of compliance required on your part. Franchising is like a partnership in the sense that each of you is expected to have a long-term relationship and there must be a compatibility between you both.

If everything seems in order, ask for an initial agreement which is conditional upon your due diligence - that is, advice from a franchise lawyer, accountant and bank. Ideally you will also do some market research to ensure this product or service will succeed in the proposed location or territory. Perhaps pay a small deposit but ask that this be held by a local lawyer or accountant on trust for both sides on the basis that if the agreement does not proceed, then you recover your deposit. Check whether any costs will be deducted from your deposit if you do not proceed. Franchisors who are members of the Franchise Association of New Zealand are bound to observe a code of ethics and to allow franchisees a seven day cooling off period before such franchisees are committed to franchise agreements.

There are many franchise systems operating in New Zealand both locally deveoped and successfully introduced from overseas.