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Aspects of A Franchise Agreement – Part One Territory

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You have decided to buy a franchised business. As a part of this you receive a copy of the franchise agreement, but you are unsure about your obligations. Our series ‘aspects of a franchise agreement’ will provide clarity on the main parts of a franchise agreement.

Your franchise agreement should clearly set out your territory. Franchisors would have already divided up the country (or state) into concise and separate territories which will be allocated to each franchisee. You should look carefully at the details of the territory to ensure it matches what you have discussed with the franchisor.

When we use the word territory, we mean a specific area where you will be able to conduct the franchised business. If the premises is within a shopping mall what will be the territory? Is it just the mall or does it include the area surrounding the mall? Ideally your territory should be identified on a map with clear boundary lines.

There are two types of territory:

Exclusive. The franchisor is not permitted to appoint another franchisee within your territory.

Non-exclusive. The franchisor can appoint another franchisee in your territory, subject to offering the new location within the territory to you first.

Some franchise systems prescribe no territories at all. If that is the case with your business, then you should be concerned about the saturation of the area of your proposed franchised business. This is especially relevant when in the case of a new system there are no actual (as opposed to hypothetical or anticipated) figures to justify a viable business. You could request a limit on the number of franchisees to operate in the area although this can also be counterproductive because it may stop the establishment of and/or the growing of brand awareness to the public.

Premises and territory are two separate matters. You can have a premises within a territory. If you move premises during the term of the franchise agreement but it is still within the territory, then that move will not be considered an assignment or transfer under the franchise agreement. However, franchise agreements usually contain a requirement that you must have the prior written approval of the franchisor in regard to any alternative premises.

Your territory can become non-exclusive or be modified if you do not comply with the terms of your agreement – for example minimum performance criteria or if the franchisor, having reviewed your performance feels you are not adequately servicing the territory. Should this occur, it must be subject to consultation with both parties.

In conclusion, you should always take great care when reviewing the territory and you must know what you are getting in relation to a territory or area.

The Pros And Cons Of Buying An Existing Franchise

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An existing franchise has a history. Starting a business is quite more straightforward today than in the past. With technology and the internet, anyone can start their business with little to no overhead costs. Franchises are a popular option for those looking to start their own business. A franchise is a business that is already established and has a proven track record.

When you acquire a franchise, you buy the right to use the franchise’s name, logo, and marketing materials. You also have access to the franchisor’s expertise and support. Moreover, purchasing an existing franchise has numerous advantages. However, you can’t overlook the fact that there are some disadvantages that you should be aware of before making your decision.

Here are the pros and cons of acquiring an existing franchise:

Pros

  • Lower Failure Rates

As long as you understand how to start a franchise, the franchisor will walk you through the journey to success. Subsequently, the failure rate for franchises is much lower than that of independent businesses.

  • Proven Business Model

Another advantage of purchasing an existing franchise is that you will follow a tried and tested business model. This indicates that the franchisor knows the ins and outs of the game. All you have to do is follow the system, and you should be able to achieve success.

  • Established Customer Base

One of the benefits of investing in a franchise is that you can tap into an already existing customer base. People familiar with the brand are more likely to visit a franchise location than a new business.

Furthermore, they are more likely to recommend the franchise to friends and family. As a result, franchisors can generate a lot of word-of-mouth marketing, which can be very valuable for a business.

Additionally, getting a customer base and hot leads can help reduce costs. This is because franchisors often have economies of scale that allow them to get better deals on supplies and marketing.

  • Easy Accessibility To Funding And Partnership

One of the challenges to starting a small business is securing funding. Banks are often reluctant to lend money to small businesses, and venture capitalists can be tough to impress.

However, investing in a franchise can make securing your needed funding much more manageable. Franchises have a proven track record of success, which makes banks and investors much more likely to put their money into a franchise than a start-up.

In addition, franchisors often have established relationships with suppliers and other partners, which can make it easier to get the resources you need to get your franchise up and running. As a result, investing in a franchise can be a great way to overcome some of the common challenges small businesses face.

  • Availability Of Training And Support

Once you join a franchise, you will have access to training and support from the franchisor. This can be extremely necessary if you don’t have any experience running a business. The franchisor will give you the tools and resources you need to succeed. Additionally, they will often offer ongoing support to help you deal with any challenges.

Cons

  • Higher Upfront Costs

One of the most significant disadvantages of investing in a franchise is that it can be costly. The initial investment can range from tens of thousands to millions of dollars. In addition, you will also need to pay ongoing royalties and marketing fees to the franchisor. As a result, it can take a while to recoup your investment.

  • Lack Of Flexibility

Another downside of franchises is that they can be inflexible. This is because you must follow the franchisor’s guidelines and procedures. This means that you will have less control over how you run your business.

For example, you may be required to use specific suppliers or follow a specific pricing structure. Additionally, you may not be able to make changes to the product or service offering without approval from the franchisor.

  • Dependence On The Franchisor

When you invest in a franchise, you are essentially placing yourself at the franchisor’s discretion. This is because they have control over the brand and the business model. This means that they can make changes that could hurt your business.

For example, they could raise royalties or change the marketing strategy. They could also decide to sell the franchise to another company, resulting in a new owner with different goals and objectives.

Final Thoughts

As you can see, buying an existing franchise has both benefits and drawbacks. It would be best to consider all these factors above to make informed decisions.

When done correctly, investing in a franchise can be a great way to achieve your entrepreneurial dreams. However, you must be aware of the risks before taking the plunge. Talk to other franchisees and do your research to ensure that you are making the best decision in making this investment.

Official Results of the 2021 Franchising New Zealand Survey

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Franchising is a method of distributing products or services involving a franchisor, who establishes the brand’s trademark or trade name and a business system, and a franchisee, who pays a royalty and often an initial fee for the right to do business under the franchisor’s name and system.

Stewart Germann Law Office was a key sponsor of the survey conducted by Massey University on behalf of the Franchise Association of New Zealand.

The results of the survey provide valuable insights on the size, impact, structure, strategies, challenges and opportunities of franchising companies in New Zealand.

On 7 December 2021 the results of the Survey were released and some of the highlights are as follows:

  • There are 590 business format franchisors in New Zealand
  • There is an estimated total of 32,300 units operating in business format franchises
  • More than 156,820 are employed directly in business format franchises
  • Sales turnover for business format franchises was estimated at $36.8 billion
  • Sales turnover for the entire franchising sector was estimated at $58.5 billion
  • 70% of franchise brands originated in New Zealand
  • Online sales grew tremendously with now almost 80% of brands engaging in online sales
  • More than 20% of franchisors have entered international markets
  • 90% of franchise brands return profits back into the community
  • Almost two-thirds of franchisors identified environmental sustainability and ethical supply chain examples, with the principal examples being enforced recycling of materials, waste minimisation programmes and hybrid car use
  • Only 18.5% of franchisors were involved in a substantial dispute (with one or more franchisees) in the past 12 months
  • COVID-19 brought considerable disruptions to trading, greater stress and mental health considerations, adjusted hours of operation, supply chain interruptions, significant sales reductions and many other issues

The data in the Survey provides a reliable source of information about the New Zealand franchise sector. Massey University was pleased to collaborate in this important research with the FANZ, the peak body of franchise representation, and SGL was proud to be a key sponsor.