Would-be franchisees told: Understand what you’re signing up for

Would-be franchisees told: Understand what you’re signing up for

Ray Clemens bought a Green Acres franchise 18 months ago as part of his retirement plan. He’d had a lawn mowing business with the organisation before, and saw the opportunity to earn a bit of money doing something he enjoyed.

But he said it had not gone to plan. While he was paying $135 a week for a guarantee of $1000 a week income, he said had earned $401 a week between December 2018 and the end of March 2019, $459 a week from the start of April 2019 until the end of March 2020 and $261 a week through April and May this year.

Those figures were gross income and he had to pay tax and other business running costs from that amount.

“Now I’d be lucky to make the dole.”

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Green Acres said Clemens had earned $38,000 over that period. It said the $1000 a week guarantee was GST inclusive.

He had also turned down $380 a week in long-term recurring government contracts and $405 a week in work that Clemens had refused or not submitted quotes for, it said.

“So in summary, Green Acres’ responsibility is to provide him with work opportunities. We’re doing that: to date we have supplied him work opportunities in excess of an average $1345 per week. His responsibility is to be available to carry out that work.”

Clemens said some of the work he was offered was too far from his Island Bay home in Wellington to make it worth his while. Some lawns were in the Wairarapa, he said.

He said he was let with a business he could not sell and a 20-year contract to fulfil.

Green Acres said Clemens had paid $18,460 for the franchise plus an equipment pack of $5000. There would have been the cost of a suitable vehicle on top of that.

McDonald's is one of the best-known franchise systems.

AP

McDonald’s is one of the best-known franchise systems.

But Clemens said his experience should prove that it’s not always straightforward.

While franchises give you visibility and access to nationwide marketing and advertising clout, investing in one also locks you into fixed costs.

There have been high-profile cases of franchises gone wrong. Former Hell Pizza franchisee Matthew Blomfield served papers on the company over unpaid bills. Mad Butcher has had a string of closures and a court battle with its Whangarei franchisee over his attempt to open his own butchery on the same premises.

Interest in franchise opportunities tends to increase in a recession, when higher numbers of people are made redundant and want to pursue an opportunity to be self-employed.

New Zealand is the most franchised country in the word, with about 37,000 franchise units and franchise sector turnover of $27.6 billion, or 11 per cent of gross domestic product.

About three-quarters of franchise brands are homegrown. Franchise businesses range from cleaning an ironing businesses through to McDonalds, Pak ’n Save and Lotto outlets.

Simon Lord, publisher of Franchise.co.nz, has been involved in franchising since the 1980s. He said success often came down to how much care was taken when a franchisee went into a deal.

“It’s important to go into it with your eyes open and understand what the nature of the franchise is, and what is required of franchisees … the important thing is to understand the nature of the relationship.

“The biggest problem is when people don’t hear what they are told or read what they are given, or don’t take professional advice. It causes a disconnect at the beginning.”

Franchisees will usually be required to pay regular fees and royalties, in return for things such as advertising and business support.

Lord said a lot of information about what it would really be like could be gleaned from existing franchisees. People should also seek legal and accounting advice from someone who was experienced with franchises.

Lord said the franchise agreements would normally be a bit one-sided, with more power on the franchisor than the franchisee so that it could protect the franchise brand and other franchises.

“If you’re not paying the minimum wage the franchisor has to be able to jump on that immediately and get you out of the system.”

Ray Clemens is in a 20-year contract.

Monique Ford/Stuff

Ray Clemens is in a 20-year contract.

People might be required to carry out refurbishment at set times, he said, and there would usually be a restraint of trade, so they could not simply carry on a business without the franchise once their term ran out. In all cases the franchise would have a finite term.

“That’s important to know – you need to be able to make money on it when you have it.”

He said interest in franchise opportunities on his website had increased by a “massive” amount in recent months. “Recession is traditionally a time when franchises do well because people are shaken out of sunset industries into new growing ones.”

The current environment had strong potential for franchises, he said, because many redundancies were in the tourism and hospitality sectors, where people had strong communication, relationship and language skills.

Those people could comfortably fit into a franchise running a childcare centre, teaching kids sport or operating a mobile coffee van. “These are people with exactly the skills more franchisors are looking for.”

He said about three-quarters of franchises were advertised as not requiring previous experience. “That might sound horrendous but it’s a measure of how well-developed the systems and training at these franchises are.”

Lord said only about 2 per cent of all franchisors had been involved in a dispute in the past 12 months and only 10 per cent of those required litigation.

Daniel Cloete, Westpac national manager of franchise and strategic partnerships, said the recent level 4 lockdown was a good example of the lease liability that many retailers may have faced.

“You should understand the financial numbers and risks yourself. Talking to other franchisees in the group is an excellent way to learn more about the business model, culture, any issues and the profitability in the group.”

He said the bank would consider things like the brand value, industry risk, competition, other franchisee performance, regular cashflow and the documentation (including franchise agreements) when considering whether to lend.

“As the bank would be lending against going concern value, it would look at the business profitability, affordability, proven sale multiples, brand value (saleable), the term of the franchise agreement and the system action in event of default.

Chris McKeen/Stuff

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“A few things that could have an impact on business value and the funding viability of the business include: franchise transfer clause restrictions, the quality of the general security agreement availability, and any goodwill payable to the franchisor on sale, brand damage or preferential payments.”

Logan Sears, Green Acres chief executive, said interest in franchises was increasing but he did not expect a big influx until there was more certainty about what the future would look like. Many people made redundant initially hoped to go back to their former industries, he said.

He said successful franchisees tended to have a good attitude and customer focus. “A good franchise support framework is important but you can’t teach attitude.”

He said people who went into business through a franchise had a much higher chance of success than those who went alone. Much of that was because of their lack of knowledge of basic business infrastructure, he said.

Would-be franchisees should check a business’s ability to deliver a regular stream of customers. “You need to know that whatever franchise you’re buying it has enough recurring revenue and the advertising budget to deliver customers.”

They should also find out what process there was to help people exit franchises, he said. “An unsatisfactory exit means people are left without a good result at the end of the term.”

He said people could buy a Green Acres franchise for about $20,000 and then would have to spend another $20,000 or so on the equipment. Green Acres requires people to sell their franchise for at least what they paid for it but offers a team of salespeople to help.

LOOKING FOR A FRANCHISE?

Westpac’s Daniel Cloete suggests looking for:

* A proven product or service

* A strong brand or accepted trade name

* A tried, tested and documented way of doing business

* Good management information systems and benchmark information

* Ongoing development of the product or concept, which is very important in mature systems to stay competitive

* Initial and ongoing training and support

* Increased purchasing power

* Coordinated marketing and advertising

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