What to Look For when Buying a Franchise

What to Look For when Buying a Franchise in New Zealand

Franchising is one of the easiest ways to get into business in New Zealand. It is a popular business structure as it allows individuals to buy into a franchised business that has an established presence in the market. When you buy a franchise, you essentially replicate an established, successful business model in a different location. The person buying the franchise (the franchisee) and the person who owns the idea (the franchisor) benefit from this model. Even so, there are still some important traits to look for in a franchise before you buy it.

The Benefits of Franchising

Buying a franchise has many benefits compared to starting a business from scratch. Its main advantage is that you are buying into an already proven business idea. This means that your franchise is more likely to succeed when compared to testing a new concept in the market. Franchises also come with all the systems and procedures for running the business and conducting marketing. These structures are easy to follow and allow you to focus on the operational part of the business.

Does the franchise have good financials?

You must always make sure that the franchise you are buying into has done well financially. If a franchise is not doing well, then it might not be the best investment. The best way to check if a franchise is doing well is by looking at its financial statements, such as its income and cash flow.

An income statement will tell you whether the business is making a profit and how much revenue the franchise business brings in yearly. You can also compare income statements from several years to gauge a picture as to how the business grew from when it first started. The cash flow statement is a crucial document for small businesses as it will determine whether a business can pay its bills on time. A business that is not bringing in regular cash will struggle to survive in the short term.

Reviewing the financial statements will also guide how your franchise business might fare at the start of its business cycle. You can prepare for this if you know that the business tends to start slowing before becoming more successful later in the cycle. If you are looking to purchase a new franchise, the above financial statements will not exist. However, the franchisor will be able to provide benchmark financials based on averages from other franchisees.

Is it a good idea for your location?

The franchise you are buying must be suitable for your location. Not all businesses will be successful in a specific area, so you must do your market research. One way you can do this is by surveying the market and finding out whether customers will buy your product or service

Another way to determine if your product will do well in your location is whether competitors to your franchise are currently trading in your area. If there are, then it shows that your product or service may do well. However, if there are no competitors, this is not always a bad sign as the franchise product or service may not have been tested in your area before.

How much control does the franchisor have?

When buying into a franchise system, it is crucial to understand the control and level of decision-making authority the franchisor has over the franchisees business. Do they have control over all the marketing? Are they able to set prices for products, and do they try to control your suppliers so that they can obtain a kickback? These are essential questions as they will affect how the business can be run. If the franchisor can set the price for certain products, this might not suit the franchise in your specific location. However, having your franchisor in charge of all marketing might benefit your franchise as it could save you time and money.

It would help if you also considered how much your franchisor takes in franchise fees and when they are due to be paid, as this can be weekly or monthly and can be before you get paid if you have a business model that utilizes accounts. Franchise fees are paid to the franchisor for the use of the business model. They are usually taken as a percentage of revenue but could also be a fixed fee. Franchise fees are used to maintain the franchisor and are usually between 5% – 6% of revenue. There will also be a national marketing fund in most cases, which is usually set to 2% of revenue.

If the franchise fees are too high, then it might not be worth buying that particular franchise, as the franchise fees will outweigh the benefit of having the business.

Do you have an interest in the product or service?

At the end of the day, you need to be interested in the product or service you are selling. Even if you are buying a franchise, having a passion for the product will benefit you and your employees. Having some previous knowledge about the industry you are buying into will help you run a more successful business. For example, if you have worked in hospitality, you will know what it takes to run a fast-food franchise smoothly. The last thing you want is to be in an industry that you have no interest in, as your business will suffer because of it.

Conclusion

the above article clearly outlines what to look for when buying a franchise. If you want to start or buy a business in New Zealand, you should consider getting into franchising. Franchising involves taking an established business brand and implementing it in another location. You own the business, but you must pay franchise fees to whoever owns the brand. It is a standard business model as your chances of success are much higher if you implement an already proven business model. When buying a franchise, you should investigate specific aspects of the business so that your franchise has the highest chance of success.

hese questions will give you a holistic appreciation for the franchise you are looking to buy and determine the price you should pay for it.

Call or email me to discuss any queries and concerns you may have on franchising. Together, we can walk through the process from initial investigations to purchasing a franchise.

We recommend you seek financial advice on the financial statements and legal advice on the legal obligations of the franchise agreement before committing to signing anything.

Please check out some of our other useful articles here.

You can find more information about what to look for when buying a franchise at the franchise association website here.

To view the available franchises for sale in New Zealand, you can find them at Franchise NZ here.