Franchising will be a popular option for those who have not owned a business before and a number of franchisors have seen their levels of enquiry increase over the lockdown period. During the current crisis, it has been valuable for franchisees to be part of a wider franchise system to receive support regarding dealing with suppliers, landlords and understanding the Government assistance available. These are just some of the benefits of being part of a franchise system as opposed to being out on your own.
Unlike many overseas jurisdictions, New Zealand does not have any franchise specific laws which specifically govern the behavior of franchisors and franchisees. There are no mandatory franchisor disclosure obligations and so the caveat emptor principle is absolutely applicable and puts the onus on a prospective franchisee to ask the right questions and satisfy themselves as to the opportunity.
If the franchisor is a member of the Franchise Association of New Zealand, then the franchisor is obliged to produce a disclosure document prescribed by Franchise Association of New Zealand that will cover some important information.
New Franchise VS Existing Franchise
New Franchise: A new franchise provides you with a clean slate to grow your business but you need to be well financed and prepared to accept that it may take some time to generate sustainable revenue. You will also be purchasing the franchise directly from the franchisor and will most likely need to pay an upfront franchise fee.
Existing Franchise: If you purchase an existing franchise this will probably be through a business broker and you will be acquiring the business assets of the former franchisee. This is likely to be more a more expensive option but should give you a client base on day one. The franchisor still needs to approve of you buying an existing franchise and your agreement to purchase the business will need to be conditional on obtaining franchisor approval.
It is vital that the franchise agreement remains commercially realistic and specialist legal advice is required to advise you whether the franchise agreement has gone too far and is overly onerous. In particular, attention will need to be paid to the sections on startup costs, on-going payments, potential liability, restraint of trade and guarantee sections. With that in mind, and as with any negotiation, it is important to proceed cautiously and not to invest too much emotionally or financially prior to reviewing the franchise agreement.
Keep in mind that a typical franchise agreement will exclude any responsibility for any statements or representations made by the franchisor during your discussions. If there is reluctance on the part of the franchisor, then you will need to place less reliance on those representations.
Get the Specialist Advice
Having found your preferred system and deciding you wish to proceed, before signing anything you should obtain specialist legal advice. Getting specialist accounting and banking advice is equally important, especially if you need bank funding to purchase the franchise. Not all accountants and major banks are actively involved in franchising and so you need to make sure you are talking to people with experience.