The franchise industry took a hit during the global financial crisis, like most other business sectors, but in recent times interest has been picking up again. Patricia Moore reviews the market and obtains advice for both franchisors and franchisees. New Zealand may not have invented franchising but Kiwis have taken to it like ducks to water; indeed we could well be the most franchised nation in the world. The 2010 Franchising NZ Survey found the sector employs around 80,400 people in 450 franchise systems over 23,600 outlets – as Simon Lord of Franchise New Zealand magazine and website points out, that’s effectively one franchise per 186.5 Kiwis. And, while 94 percent of survey respondents represented home-grown franchise systems, Lord says the overall sector-wide figure is somewhat lower than that. He believes around 25 to 30 percent of franchises operating in New Zealand originated overseas. “A quick count through the franchises listed in our Directory alone will identify around 75 overseas-founded systems out of 250 listed,” he says. The survey, carried out by Massey University, in conjunction with Australia’s Griffith University, was the first research done on the sector since 2003 and was an important one, says Graham Billings, executive director of the Franchise Association of NZ. “It was much more thorough than any previous research and it’s enabling us to compare the New Zealand franchising situation with that of Australia, which Griffith has been surveying for some years.” The report also means the Franchise Association is able to talk more coherently to the Government about the importance of franchising as a sector, says Billings. The exercise will be repeated on a biennial basis with the 2012 survey currently underway and they’re hoping for a greater degree of participation. “Although the 2010 response rate (21 percent) was higher than Australia, we’d like to see it increase,” says Billings. “We’d also like respondents to be more forthcoming in terms of their financial performance. The responses in that area were not sufficiently robust to be definite about.” “Franchising almost doubled between 2003 and 2010,” says Sean Dwyer, national franchise manager for ANZ and National Bank. “Potential franchisors see the benefits of going the franchise route: secured distribution channels, spreading the risk, minimum capital and having self-motivated business owners.” But whether franchising a business or buying a franchise, it’s the quality of the homework that makes all the difference. “There’s no substitute for due diligence,” says Dwyer. (He advises checking their Business Resource Centre and Biz Hub websites.) “And potential franchisors need to engage the assistance of a reputable franchise consultant. Franchising does cost but it’s worth spending the money now and getting it right, rather than going down the wrong path and regretting it later. The old saying ‘penny wise and pound foolish’ comes to mind.” “You’d be surprised how many people think they can do it themselves”, says Win Robinson at Franchize Consultants. “In most cases they can’t. I know of one Australian company that’s been over here and failed, three times.” Franchize Consultants assists the development of new franchise systems, but Robinson says they’re currently spending a lot of time reviewing existing systems. “The financial crisis has exposed weaknesses in many areas, mainly because the franchise wasn’t structured correctly in the first place, or the market has moved considerably and they haven’t kept up.” System reviews are often driven by franchisees either not performing to expectation or becoming dissatisfied. “One of the worst things a franchisor can have is a dissatisfied franchise owner – because they talk, particularly to potential franchisees.” No guarantees Franchising a business can see a small local enterprise become a nationally known brand. But while franchising is a proven road to growth it doesn’t come with a guarantee. You may have developed a well-established, hugely profitable enterprise, but will it work elsewhere? Has it a unique proposition that sets it apart – something that appeals to both potential consumers and franchisees? Can you lead and mentor others? Do you have a team of experienced franchise professionals to guide you through the process? Can the business support the cost of franchising? Attracting suitable franchisees and sourcing finance are both issues concerning the sector, and while the banks may not have changed their stance on funding franchises, the reality is many potential franchise buyers have less equity than they had before the property market imploded, says Lord. “Therefore they haven’t been able to borrow as much as they might have four years ago.” However, after a quiet few years, Daniel Cloete, Westpac NZ national franchising manager, is seeing renewed interest in franchising. “On-selling of existing outlets is happening quite a bit more and some of the franchisors have quite extensive growth plans that will contribute to a bit more life in the industry. While it’s still early days, there’s greater interest in franchising from local businesses and from overseas systems. Prices have probably got a little more realistic which makes deals stack up.” Being your own boss has a lot of appeal; as a franchisee you are ‘the man’ with the added confidence that comes from operating a proven business system, plus the backup and support of the franchisor. But despite the fact that the survival rate of franchises is better than that of independent small businesses, there will always be failures. Undercapitalisation and mismanagement are two of the main reasons. Personality comes into it too, and a potential franchisee needs to ask him or herself if they have what it takes to run a business. Extensive lists of pre-purchase dos and don’ts are readily available. Doing something you love is a key, as is the profitability of the enterprise – and not underestimating the costs involved. Really getting to know the franchise by looking at it from the perspective of both buyer and customer, and getting the right professional advice also rate highly. The past few years have been challenging for businesses across the board; the franchise sector has been no exception but franchises with robust structures, particularly smaller businesses, have actually done well, says Lord. And he notes New Zealand is beginning to reflect overseas trends for consolidation. “We’re seeing a trend towards major companies owning a number of franchise brands, supporting even bigger bulk buying and spreading administrative costs.” He says there’s also a trend for franchisees to own multiple outlets, which can give a franchisee “more muscle within the system.”
Posted on: Fri, 28 Jun 2013 06:35:25 +0000
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