What is Franchising?
Put simply, franchising is a form of business where a company (called the franchisor) expands nationally or internationally by granting a person or company (called the franchisee) the right to operate their business model in another geographic location for a set period of time. The right will usually include the ability to use the brand name, the business system and the know-how of the franchisor.
The franchisor gains its income from initial and ongoing fees paid by the franchisee. In return, it must provide a variety of services to encourage the continuing profitability and growth of the franchisee’s business.
Franchisees invest in setting up the business in their own areas and are the owners of their own businesses. They receive their income from successfully marketing their products or services under the brand name of their franchisor.
Is Franchising Reputable?
Franchising has proven to be one of the most dynamic business methods of the past 60 years. It enables companies that have a desirable product or service to expand faster by harnessing the capital, local knowledge and commitment of individuals who are in business for themselves.
Franchising provides those who wish to be self-employed the ability to go into business properly trained and equipped, with the security of a well-proven product and system behind them.
Franchising is a reputable part of daily life in New Zealand. Many of our best-known brands have franchises: New World, NZ Post, Bakers Delight, The Coffee Club, Columbus Coffee, Paper Plus, Green Acres, Paramount, VIP Home Services, Subway and, of course, McDonald’s. Franchising should not be confused with ‘pyramid selling’ or network marketing.
How Big Is Franchising?
Based on the 2017 Survey of Franchising carried out by Auckland’s Massey University and Griffith University of Queensland and sponsored by the Franchise Association, the sector is estimated to be worth over $27 billion (excluding fuel and motor retail franchises) and represents approximately 11% of New Zealand’s Gross Domestic Product.
There are over 630 franchise systems in New Zealand and over 37,000 operating units. Franchising employs over 120,000 people with 59% of them being employed on a full time basis.
There are benefits to franchising for both parties
Starting up a business is a calculated risk. It is made all the more so when figures suggest that around 4 out of 5 independent businesses cease trading within five years from their launch.
A successful business requires the right formula, which is made up of everything from product range, promotional strategy and pricing, to location, resourcing and the use of technology and systems. There are a lot of traps for the inexperienced – hence the major reason people buy franchises. They buy the experience and the formula from the franchisor in order to help minimise the risks and increase their chance of success.
Franchising has yet another key inherent benefit that influences franchisee success. The franchisor relies on your success to reap its own rewards, which means that there are real incentives for the franchisor to assist you in achieving those rewards. Good franchising is a partnership between franchisee and franchisor, and well-structured franchise systems ensure that franchisors have the necessary incentives, as well as legal obligations (via the Franchise Agreement) to provide you with the level of support that an independent business owner could never achieve.
Some of the more specific advantages to franchisees are:
- Ongoing Guidance and Support Services
- Brand Recognition
- Bulk Purchasing
- Co-ordinated Promotion
- Minimisation of Capital Expenditure
- Use of Intellectual Property
- Territorial Guarantees or Exclusivity
- Asset Growth
The above advantages are expanded in detail in our free online Franchisee Pre-entry Online Education Programme.