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Sunday, October 25, 2020
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Turning summer holiday dreams into business reality

If you’re one of many that find the summer holidays lead to thoughts of living the dream and operating your own franchised business, how do you choose among the 631* franchise systems operating in New Zealand?

Amultitude of factors lead to business success, but in franchising, a successful system will possess three characteristics – good single unit economics, a well-resourced franchise support structure, and the likelihood of longterm economic sustainability.

1. Good single unit economics

A franchise must provide a reasonable profit and return for the capital and human resources engaged in the business.

However, a high number of outlets and franchisees does not always reflect a successful franchise model.

Most franchisors make their income from the top-line of franchise fees or sales in the system, but franchisees make their living from the bottom-line, the profit at a single franchise unit level. They are different dynamics and not always linked.

You should ask, on average do the franchisees make money? If I follow the system, will I make money? Also look at the set-up costs for a new franchise versus those on the market or recently sold, and how long existing franchisees have been in the system.

If the franchise system has multi-unit franchisees, is this due to good single unit economics or because having just one outlet or franchise doesn’t make enough money?

2. Solid systems and a sound support structure

The second criteria is a well-resourced support structure covering initial training, ongoing support and marketing.

What and how long is the initial training? Who conducts the training? Training can be assessed by visiting existing franchise outlets and seeing how consistent the experience is.

Post training, what support is provided by the franchisor? How structured and effective is the support? Ask questions about franchisor’s support office and who’s on their team? Meet with the different support team members to get to know who you will be dealing with on a regular basis.

Marketing is the third area of support to scrutinise. How are the franchisees’ marketing contributions spent and how effective is it? What support and material is provided to undertake local marketing and how does this integrate with national programs. Ask your friends, “what do you know of x brand”. Does the marketing perception and brand delivery match?

3. Economic sustainability

You want the best chance of ensuring profitability over time, and the ability to exit the business and gain a return on your capital.

Looking forward to assess long term economic sustainability is a little like crystal ball gazing, but a mix of prior performance and market analysis can clear some of the smoke.

How long has the brand been around, how long has the franchisor operated the brand? Is the brand growing? And if not, why? Is it in a market that is saturated or a category in decline? Technology and trends need to be considered.Will the brand (or even category) be around in five years?

After covering the above in your due diligence, also use a franchise specialist accountant and solicitor before you sign a franchise agreement.

Critically, visualise yourself enjoying a new role as a franchisee in the brand. Being happy is an essential step to success.

The Franchising New Zealand 2017 Survey http://franchise.co.nz/survey

Nathan Bonney
Nathan Bonney
Director of Iridium Partners. He can be reached at nathan@iridium.net.nz or 0275-393-022

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