Watch out for Red Flags while dealing with Franchisors

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Khushbu Sundarji
Auckland, June 11, 2022

On 7 December 2021, the results of survey conducted by Massey University on behalf of the Franchise Association of New Zealand were released.

Stewart Germann Law Office was proud to be a key sponsor of this survey.

Some of the results from the survey were (1) There are 590 business format franchisors in New Zealand (2) There is an estimated total of 32,300 units operating in business format franchises (3) More than 156,820 are employed directly in business format franchises (4) Sales turnover for business format franchises was $36.8 billion (5) Sales turnover for the entire franchising sector was $58.5 billion (6) 70% of franchise brands originated in New Zealand and (7) Online sales grew tremendously with now almost 80% of brands engaging in online sales.

Excellent entry point

It is positive to see that even after the various lockdowns due to the Covid-19 pandemic over the last two years, business format franchising is thriving in New Zealand. Franchises can be an excellent entry point into owning businesses, especially for first time buyers. However, before you sign any agreement you must always conduct thorough due diligence on both the franchise and franchisor, and you should always obtain independent legal and accounting advice.

All franchisors who are members of the Franchise Association of New Zealand (FANZ) must provide a disclosure document that provides details on the franchisor, the financial background and how much you are expected to pay each month. If the franchisor is not a part of FANZ, it should still provide the earnings history of the franchise, how long it has been operating and the number of stores.

(From Franchise New Zealand Website)

A few important tips

Talk to other current franchisees about the franchise. The franchisor should provide current franchisee details for you to contact three or more franchisees. When you speak to the other franchisees do not be afraid to ask about the earnings potential as advised by the franchisor and the robustness of the franchisor/franchisee relationship.

Request a breakdown of the costs involved in entering into the franchise from the franchisor. This breakdown will include training costs and monthly payments as well as the working capital required. Sometimes the franchisor will include indications of legal and accounting fees, but we do not recommend relying on such figures as these fees will be advised by your accountant and your legal advisor, respectively.

Review a draft copy of the franchise agreement. You should look at the nature and extent of your obligations and that of the franchisor, your rights to renew or sell the franchised business, and your territory and restraint provisions.

Engage an accountant to review the financial statements provided by the franchisor. Some franchisors require that your accountant provides a certificate confirming you have been provided with financial advice.

Khushbu Sundarji

The Big Red Flag

You should be wary if the franchisor is not willing to provide any of the above information, demands that you pay a deposit before you see any documents or information or promises ‘big profits’ but is unable to provide any further details.

This is a big ‘Red Flag,’ and you should not enter into any further negotiations or sign any agreement until the franchisor provides you with details about the franchise. It is better to invest time and money on research, but not enter into a franchise agreement as opposed to signing a franchise agreement without doing any due diligence. The money spent trying to resolve the issues will far outweigh any money you would have spent on obtaining initial accounting and legal advice.

Khushbu Sundarji is a franchising lawyer and Partner of Stewart Germann Law Office in Auckland, New Zealand. She can be contacted on (09) 3089925. Email: khushbu@germann.co.nz

Booking.com

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