Banking on a Brand - The Risky Business of Franchises

I have had a few clients come to me recently asking about the benefits and pitfalls of entering into a franchise agreement. There is also the risk that the franchisor might want to close the entire franchise business down. So, I engaged the services of Ernest Schuch, my Patent Attorney in Wellington, ernest@advanceip.co.nz , whom I have worked closely with over the past 25 years, to write an article on the subject for me.

This is what he has to say…

An offer to enter a franchise arrangement may seem compelling, and can work for some franchisees, but doesn’t work for all business owners.

A franchise can typically offer a turnkey business system with an established brand along with all manner of business support and knowledge to ensure maximum profits and easy of operation – according to the sales pitch.  A heavy dose of due diligence is essential to sift through fine print to work out whether spring-boarding into a franchise business operation for quick short term profits is still worthwhile in the medium - long term.

Focusing on the brand aspect, a new franchisee can avoid having to design and register a new brand, organise signage, a new website and stationery and materials, and build a customer base, provided they pay an initial franchise fee, and on-going fees based on percentage of profits or other such formula. Although this arrangement can be beneficial, it is noted that over time the franchise operator will be paying for, and using the brand, for the entire benefit of the franchisor owner and other franchisees.  Any industry awards, endeavours with local marketing, and maintaining a great reputation takes additional effort and cost.  All that enterprise will be lost if a franchisee decides at any time to walk away from a franchise operation, and shouldering the cost of exiting, as well as having to rebrand from scratch in a new business.

There are many good reasons to opt out of a franchise, such as avoiding restrictions on operating, and lack of control over business decisions, lack of financial privacy as a result of reporting requirements, high franchise fees, lack of support and slow developments by a franchise owner, not being able to make all business decisions independently, and finally, conflicts and tensions arising with the franchisor.

In a situation where a franchisee has decided to bail, and they can see a better independent pathway, devising an exit strategy is essential, with first receiving necessary business and legal advice and a new brand and business strategy, before taking steps to end the franchise arrangement.   

If you have any questions after reading this information, go to Contact Us on our website www.DaltonPlan.co.nz and type in your request, or just call me on 021 27 17 043.