What To Consider When Buying a Franchise

16 March, 2021 | Bret Gower

If you are looking to buy a franchise, the first thing you need to consider will be whether the franchise agreement provides rights and obligations that you are prepared to work within. It is a common understanding that, in general, franchise agreements tend to favour the franchisor. While that may appear to be the case, you may still have the ability to negotiate favourable terms depending on a number of factors.

Negotiating the agreement

The legal status of franchising in New Zealand is not regulated by specific statute as it is in Australia. This means that franchise agreements are regulated under contract law provisions of the Contract and Commercial Law Act  and the general application of the common law. So, while the franchisor might be of the opinion that the franchise agreement is set in stone, you are not prevented from negotiating terms and conditions within the agreement as you would with any other contract. Similar to any contract negotiation it will be a matter of where the balance of power lies, and which party is prepared to accommodate the other.

Franchise terms & renewal provisions

Potential franchisees need to consider whether the business arrangements contained within the franchise agreement are appropriate to their circumstances. For example, if the franchise agreement is for a limited term this means that at the end of the term, if there is no right of renewal, you as the franchisee will be required to walk away from the business and may even be constrained by a restraint of trade.

It is important that as a potential franchisee you understand the value being provided under the franchise system and what kind of return you need to make on your investment.

Renewal fees

Often, the franchise fee or, in some circumstances, a renewal fee will need to be paid again at the beginning of any renewal term. Franchisees can invest a lot of time and money generating goodwill in a business that they have no right to retain at the end of the franchise period.

Common issues for franchisees

Other common issues for franchisees include onerous marketing, administration or other fees and poor support from the master franchise holder.

Does the term of the premises lease match the term of the franchise, or are the two reliant upon each other?

Franchise territory

Another point for franchisees to be aware of, particularly with those who gain customers via the Internet, is having a clear understanding of territory and customer location.

Are you constrained to servicing customers within your territory or alternatively how do you prevent other franchisees from poaching customers within your territory? Good franchise agreements provide mechanisms for dealing with territory transgressions or porous territory boundaries.

Provisions for exiting the franchise

When considering entering a franchise agreement, franchisees need to also spend time considering their exit from that agreement. What happens if you want to on-sell the business, or simply want to cease trading?

What is the termination process? And what is the notice period for each of the parties? Franchisees must understand how the agreement affects their ability to terminate – in some cases termination is an option only available to the franchisor, which can be a costly oversight on the franchisee’s part if they cannot exit or assign the franchise.

Due diligence

Franchisees need to do their research when it comes to a franchise system so that they know what they are getting themselves into. We recommend clients review the Franchise Association of New Zealand’s Code of Conduct, which contains many of the rules contained in the Franchising Code of Conduct of the Australian Competition and Consumer Commission, to gain an understanding of franchising best practice in New Zealand.

If you are looking to buy a franchise in New Zealand, talk to us about your business plans and whether the franchise agreement in question provides a suitable structure for achieving them. We regularly work with clients buying and selling businesses, so we have a good understanding of clients’ expectations and the risks involved in regards to small to medium sized business in New Zealand.

To speak to someone about buying into a franchise, contact expert NZ business lawyer, Bret Gower by email on bret.gower@smithpartners.co.nz or phone 09 837 6893.