NZ Business - - CONTENTS -

ONE OF THE rea­sons fran­chis­ing has be­come so pop­u­lar as a way of do­ing busi­ness is that it is so flex­i­ble. With vari­a­tions, the fran­chise model has been ap­plied to in­dus­tries as dif­fer­ent as fast food and build­ing, ho­tels and home ser­vices. There is al­most no in­dus­try, it some­times seems, where a prop­erly-de­vel­oped fran­chise sys­tem can­not flour­ish.

And yet many new fran­chise sys­tems never get off the ground, while other ap­par­ently at­trac­tive brands fail the mo­ment an eco­nomic down­turn comes along. Why should this be?

Well, the rea­son fran­chis­ing is so flex­i­ble is that it is highly adapt­able. The orig­i­nal fast food model of mod­ern fran­chis­ing has evolved into a large va­ri­ety of struc­tures and for­mats, each de­signed to suit a par­tic­u­lar style of busi­ness. This means you need to do your home­work. If you just copy some­thing that seems to work for some­one else, the chances are that you will pick the wrong struc­ture.

Let’s take ter­ri­to­ries, for ex­am­ple. Ev­ery fran­chisee likes to feel that they have an ex­clu­sive ter­ri­tory within which they can mar­ket their busi­ness know­ing they are free of com­pe­ti­tion from other franchisees within the same com­pany. That seems only fair, doesn’t it? And it’s cer­tainly a struc­ture that their lawyers and ac­coun­tants like. But how big should that ter­ri­tory be? What should it be based on – maps, malls, post­code bound­aries or de­mo­graph­ics, to name just four pos­si­bil­i­ties? Should it be ca­pa­ble of be­ing di­vided or sub­fran­chised? Should there even be a ter­ri­tory at all?

For the new fran­chisor, think­ing through all these as­pects is cru­cial to es­tab­lish­ing a suc­cess­ful and sus­tain­able busi­ness model, both for the fran­chisor and the fran­chisee. Make the ter­ri­to­ries too small and the fran­chisee may never pros­per. Make them too large and the fran­chisee may never ex­ploit their ter­ri­tory prop­erly, re­duc­ing fran­chisor in­come and leav­ing gaps for the com­pe­ti­tion to en­ter.

In some cases, where re­fer­rals and net­work­ing are im­por­tant in­gre­di­ents, hav­ing a de­fined ter­ri­tory at all may dam­age fran­chisee growth.

Fee struc­tures are an­other area where things reg­u­larly go wrong. Like ter­ri­to­ries, fees need to be care­fully set. Ini­tial fran­chise fees must be large enough to off­set most of the fran­chisor’s costs in es­tab­lish­ing a new fran­chisee (al­though even this is not fixed in stone) but small enough to be af­ford­able. On­go­ing fees or roy­al­ties must be large enough to pro­vide the fran­chisor with the rev­enue re­quired to fund their on­go­ing sup­port ser­vices, but small enough to en­sure that the fran­chisee can make an ac­cept­able re­turn on their in­vest­ment.

Many new fran­chisors don’t ac­tu­ally know what sup­port they will be re­quired to pro­vide on an on­go­ing ba­sis. Vis­it­ing the first four or five franchisees per­son­ally ev­ery few months is one thing; es­tab­lish­ing a pro­fes­sional sup­port of­fice for 50 or more franchisees with staff, com­mu­ni­ca­tions, travel and ac­com­mo­da­tion bills is a very dif­fer­ent mat­ter. A fran­chisor who sets up with an on­go­ing fee of, say, five per­cent just be­cause ‘That’s what oth­ers are charg­ing’ is set­ting them­selves up for trou­ble. Then there is the is­sue of

how the on­go­ing fees will be cal­cu­lated. In some sec­tors, a flat weekly fee is the norm; in oth­ers, a per­cent­age of turnover is more com­mon. There may be a mark-up on prod­ucts or ser­vices pro­vided. Sup­pli­ers may pay a com­mis­sion, or the fran­chisor may take the head lease on prop­erty and sub-lease to the fran­chisee at a profit. There may be ad­di­tional fees for, say, na­tional mar­ket­ing or ac­count­ing ser­vices.

All of these struc­tures and more are in use and all of them are work­ing for some­one. But none of them is work­ing for ev­ery­one – and that’s where the pit­falls lie for fran­chisors who don’t do their home­work.


In men­tion­ing just the ar­eas above there are over 250 dif­fer­ent com­bi­na­tions of struc­ture pos­si­ble, and we’ve only scraped the tip of the ice­berg. Struc­tur­ing a fran­chise prop­erly takes a great deal of re­search, care and ex­pe­ri­ence, and the truth is that few busi­ness own­ers – no mat­ter how well they run their ex­ist­ing busi­ness – have the breadth of knowl­edge nec­es­sary. Con­se­quently, many new fran­chises find their early stages are typ­i­fied by trial, er­ror and luck – both good and bad.

It’s no sur­prise, then, that some fran­chises fail to achieve their po­ten­tial.

But get it right and the re­wards can be huge. In­vest the time and re­sources to think things through. Talk to ex­ist­ing fran­chisors, use ex­pe­ri­enced con­sul­tants (not just lawyers) and read widely.

Above all, for­get the cookie cut­ter ap­proach. In­stead, look to cre­ate a struc­ture that works for your busi­ness and your franchisees.

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