Franchising your business

• Business growth.
• Increased financial returns or other benefits.

• Expansion / growth of your existing business interests by going multi outlet or getting bigger.
• Greater distribution of a product that you source or manufacture.
• Selling a “formula” (covering whole or parts of the business) for a price so others can replicate what you do.
• Growing the brand to the benefit of your product or service sales.

• It is a grant of rights.
• It is the right to use an existing reputation, name, image, ideas, experience, group benefits and support to operate a business.
• It can vary from a simple right to use a trade name and image with little supervision or support from the owner through to a full business model with full head office type support and stringent performance requirements.
• You can sell the rights to franchisees to start up new businesses, or, you can sell the rights to existing businesses to convert to your brand and systems.
• A franchise normally has a finite term (it is not an outright sale of a business) and may be restricted to a territory.
• The franchisor may, or may not, operate in the same business.
• A franchise agreement is often very heavily weighted in favour of the franchisor to enable the franchisor to protect and uphold the standards and reputation of the brand.
• A franchise may allow the franchisee to sub-franchise or develop an area (a country or region) with multiple units.

• A licence is also a grant of rights. Licence simply means permission to use or do something.
• Legally a franchise is a type of licence; but common use of the word franchise tends to indicate a more complex, mutual relationship involving use of a business model with ongoing support and performance standards. 
• You don’t have to label it a franchise. Many people prefer to use the words Licence, Licensee and Licensor.

• You will need to change your role from that of successful business owner and operator, to that of franchisor. It is a new job. It is a head office. You can carry on your existing business but you have a new role as well.
• A franchisor can be a company or individual.
• The franchisor needs to identify and capture the methods, standards, training, procedures and bundle them up to enable a franchisee to run an independent business that achieves one or all of the above objectives for the franchisor, while allowing the franchisee to achieve financial and other rewards. This is where a franchise consultant may be necessary to help you identify and document the procedures (manuals) and work out the financial viability of franchising for you and franchisees (feasibility study).
• The franchisor also needs to feel confident that there is a market for the business products or services. (Just because you can replicate the business doesn’t mean someone else will succeed in another location).
• The franchisor needs to recruit and sign up franchisees. These people will need to have financial means and have the potential to be clever, independent, but compliant business people (The key here is to identify a way of screening and selecting suitable people, and not being desperate to sign up franchisees for their purchase money!)
• The franchisor needs to help franchisees set up their new business and depending on the structure - give them ongoing advice and support. For years and years!
• The franchisor may need to become involved with site selection and lease negotiations. Landlords and mall management can be very difficult creatures.
• The franchisor needs to be aware of market developments and needs, product and service improvements, and constantly communicate these to franchisees.

• The franchisor needs to counsel, motivate and guide franchisees who are not coping or successful.
• The franchisor needs to recognize and encourage successful franchisees.
• The franchisor will get the blame for everything that goes wrong, and get no credit for anything that goes right.
• Franchisees will walk out on their businesses.
• Franchisees will threaten to sue.
• Franchisees will group up against you.
• Franchisee will want to use their own procedures and think they know better, or copy what you own and say they don’t need you anymore.
• Franchisees are not necessarily any more motivated or successful than employees.
• Franchises fail.
• Franchises can be extremely successful.
• Franchisees that are successful can make a franchisor very successful.
• Once you have made the initial “sale” you need to offer ongoing rights, brand reputation and value to ensure the franchisee continues to need and want you involved. That is where they happily pay royalty.
• You need to be firm but fair.

• Many people talk about franchising as using other peoples capital to grow your business. This is not entirely accurate.
• You can spend a lot of money (10s of $1000s) on consultants / manual writer / designers / lawyer / trade marks and patents / business broker setting up the franchise package and getting franchisees signed up.
• It is your choice about how much professional help you get.
• Many franchisors have started successful franchise systems without external advice, but many franchisors are happy to engage specialists to ensure a professional and focused project.
• You will normally get an upfront payment (initial franchise fee) from new franchisees – normally anything from $10,000 to $70,000 covering the grant (sale) of rights. Hopefully some profit or capital income is included here. You might also charge other upfront costs separately such as training, provision of standard equipment, premises fit-out etc.
• Most franchises then have ongoing payments throughout the term of the franchise – percentage royalty or fixed fees or simply markup on goods. Often there is a separate marketing contribution payable and there can be other fees and costs depending on the services and support provided by the franchisor.
• The Franchisor will have ongoing overheads and capital costs in marketing, product development, and support of the franchisees. It is not uncommon for a franchisor to lose money operating a franchise network.
• Some systems have a lower entry cost with more focus on ongoing value and support which justifies a royalty or ongoing fees. These systems need more franchisor support and input, and the franchisor benefits from successful franchisees.
• Some systems might have the bulk of the value handed over at the beginning. For example where a specialist trains a non-specialist in a trade or skill, gives advice and assistance on starting up a business and hands over a manual or other tools for the franchisee to go off and run the business. It would be acceptable here for income to the franchisor to be focused on the upfront payment and upfront value. It may be that the level of ongoing association is low. This is fine if the franchisor has little to lose if a franchisee does not continue the business, or, acts inconsistently with the system or standards.

Currently in New Zealand there is no formal standard or law about how a franchise should be structured and operate. It can be whatever suits a ‘franchisor’ and whatever is sustainable to a franchisee. Obviously there is plenty of practical information about what works – use that information and advice but be selective and firm with your own objectives as you proceed.