Franchises are popular business models, but people could get badly burnt if they don’t know what they’re getting into, a lawyer warns.
Emma Hague spent most of her life working for her family’s bed manufacturing business, but her keen interest in beauty had her aspiring to start her own business.
She was initially discouraged from starting a beauty business because she was told there would be no money in it. So she abandoned the idea temporarily.
That was until her family decided to wind up the business and she had the chance to do something new.
Hague started working at a Caci clinic a couple of years ago and just a couple of months before Covid-19 hit our shores she and her partner Steve O’Connor decided to buy into the franchise.
The couple went through a rigorous process that included an interview, meetings with lawyers and accountants to read over the franchise agreement and selling their rental property to purchase a new clinic in East Auckland.
While she understood the business well, Hague says she knew little about franchising.
But a major appeal was that buying into the franchise was like “buying a business in a box”, Hague says.
In the nine months since the Howick store opened, the new clinic has been a success story with people wanting to splurge more on treating themselves for beauty treatments, O’Connor says. The company has been cash flow positive, and having staff already trained by Caci also helped the business.
But not all are so lucky.
“There have been many times when the first time they read through their contract was with me, while resolving a dispute.”
– Deirdre Watson, franchise disputes lawyer
Lawyer Deirdre Watson, who specialises in franchise disputes, says every year she deals with complicated franchise agreements that soured.
Franchise businesses can fail for a whole host of reasons, but Watson says too often most issues are rooted in the franchisee not understanding their contract.
“A lot of people don’t understand when they buy a franchisee, they’re not buying a business. They’re only buying the rights to operate a business for a certain period of time,” Watson says.
“There have been many times when the first time they read through their contract was with me, while resolving a dispute.”
The franchise model typically involves paying a set up fee to buy the business and then the franchise takes a cut for marketing, training and administration from the franchisees’ sales. O’Connor says in Caci’s case, the couple also had to pay an additional fee to reserve their geographical area.
Questions before signing a franchise agreement: Is this a new franchise or an old one? What has the best franchisee in your system generated, and what’s the worst? How much can you sell it for and can you get a profit? Will I be earning less than the minimum wage? Are other franchisees always on sale, if so, why?
Watson says over her 20 year career she has seen franchise models spread and become more popular as options for entrepreneurs starting out, particularly those who might be new to the country and have limited contact networks.
And as they’ve grown, the number of disputes have also increased.
In 2017 New Zealand was the most franchised country per capita in the world, with more than 630 franchise systems and 37,000 operating units, according to Massey University and Griffith University survey commissioned by Franchise NZ.
Most of these businesses were in the retail sector but were across a number of industries, ranging from small lawn mowing companies to real estate franchises and supermarkets.
Watson says in franchises where barriers to entry are low, people are more likely skimp on forking out $1200 for legal or business advice.
Franchise agreements are “extreme” and can be very restrictive, Watson says, but they need to be in order to protect the brand and ensure uniformity in service. Breaching the franchise agreement could result in the franchisee losing their business, revenue, and having a restraint of trade.
O’Connor says Caci’s brand has been one of the reasons their clinic has been so successful in such a short time.
“They’re very particular about who they choose and even with the lease. If you can’t trade well they can take over the lease. They’re very protective and particular, which I think is a good thing.”
Hague says she was glad Caci insisted on the pair using lawyers and business advisors before signing their contract.
“It’s a big contract. Our lawyer pointed out a couple things we hadn’t even registered.”
O’Connor says their experience with Caci had been better than they could have hoped for, with a “hands on” approach during the setup process, that included sharing other clinics’ profit and loss results.
“Once you’re on the bandwagon they’re with you giving explicit detail.”
Watson says before signing a franchise agreement people should ask questions about the business model and take note of things the master franchisor will and won’t reveal.
Questions people should consider before signing a franchise agreement include: Is this a new franchise or an old one? What has the best franchisee in your system generated, and what’s the worst? How much can you sell it for and can you get a profit? Will I be earning less than the minimum wage? Are other franchisees always on sale, if so, why?
Watson says the dream of franchising is being able to buy a ‘how to’ guide for running a business.
“If you follow the system it should work, that’s the theory of it.”
