Look at the odds and hazards before picking up a franchise

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Khushbu Sundarji

Khushbu Sundarji

Auckland, June 26, 2022

Are you looking at franchising your business? Before you decide you should review the following:

Ownership of intellectual property: (a) Who owns the copyright in all of the manuals and other documents used in the business? (b) Are all of the logos used in your business registered trademarks? If not, you must apply for the trademarks as soon as possible to protect your intellectual property.

Critically evaluate your business: Is your business profitable? If your business is not profitable, franchising will not fix the problem. You must invest money to change your business into a franchised business format. Can your business be taught easily to others? There should be effective training processes and resources in place well before you make a move into franchising.

Assess the market

You must thoroughly research the market to see what is already out there. Is there a business in your particular industry that is already doing what your business does? If so, is your business distinctive and has an edge over the competition? You should also look at similar businesses that have both succeeded and failed in your industry. You need to be realistic about whether your potential franchised business can make a mark in your industry and succeed. It may be that you will need to adjust your business model after conducting your research.

Seek legal and accounting advice

We recommend that you seek expert legal and accounting advice. An accountant will advise you if it is financially viable for you to start franchising and the costs and investment involved.

You must always use a lawyer experienced in franchising who will explain your obligations as a franchisor and draft the Franchise Agreement. It is essential that you understand your obligations before you start issuing franchise agreements.

You should also ensure that your manuals, training and accounting systems are set up before you start looking for potential franchisees.

 Advantages and disadvantages of franchising

Like with any business model franchising has advantages and disadvantages: (1) The operating costs will be reduced as it is the franchisees that will be paying the costs of the day-to-day running of the business. You will also receive ongoing fees and royalties for the use of your system and intellectual property (2) You will be able to expand much quicker than if you were opening stores yourself and you will have the capital from the franchisee as opposed to borrowing to obtain those funds (3) Your system will also be centralised, and the manuals will advise how the business must be operated. This will mean that your customers will receive the same standard of high-level service at all outlets.

However, you have less disciplinary control over the franchisees, and it may be tough to remove unsatisfactory franchisees. There is always a risk that any unsatisfied franchisees may damage your reputation and goodwill which is a key part of your system.

You will also need to disclose a lot of confidential information regarding your system to potential franchisees and there is the danger that franchisees exiting the franchise after the initial term may use your confidential information to set up competing systems.

You should not rush into becoming a franchisor. The payoff may not be foreseeable in the short term and may in fact take a few years.

Reasons for failure

Franchisors have failed in the past for a number of reasons. These include not fostering the relationship with the franchisees, not providing assistance to the franchisees or not acting in good faith.

Successful franchisors have been able to ensure that their franchisees are aware of their obligations and make sure that the business is run correctly under the franchise agreement and manuals, but are always willing to assist and adapt to their franchisees’ needs if a franchisee is struggling.

If you are thinking about franchising your business please contact us.

Khushbu Sundarji is a franchising lawyer and partner of Stewart Germann Law Office in Auckland. Phone: (09) 3089925; Email: khushbu@germann.co.nz.


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