The less appreciated approach to making money in franchising

Franchisee entrepreneurs are attracted to a franchise business for many reasons.The less appreciated approach to making money in franchising.

Franchisee entrepreneurs are attracted to buying a franchise business for a variety of reasons including brand passion or wanting the support and guidance of an established business system. Universally, people invest time and effort into a business with an expectation of a financial return.

The conventional approach has broadly been one of two options depending on the individual's risk profile, experience, and capacity to build and develop a business.

The first, invest into a new or greenfield opportunity – grow the business and hopefully enjoy both positive cash flows generated by a profitable business, and capital gains over time by increasing the value of goodwill. By and large franchises grow their footprints on this platform with franchisee entrepreneurs.

The second approach is to purchase an established well-performing business with a proven trading history. This tends to attract franchisee entrepreneurs with a lower risk profile.

They have the benefit of being able to see the history and performance of the business, and in many cases it can be an easier operational path to follow. They are of course making an assumption, and assuming an associated risk, that they will be able to maintain the performance of the business, continue to enjoy the benefits of the business' profitability and protect the goodwill component.

The less-appreciated approach

There is a third and very neglected option for franchisee entrepreneurs, and one that I would suggest provides a number of potential upsides versus the two traditional approaches – this is to purchase an underperforming or even unprofitable franchise business. This sounds like it flies in the face of the universal objective of generating financial returns, but first we need to look at where and how financial return is generated.

What's driving performance and can it be altered?

The incomparable advantage of buying into a franchise system is the ability to see and use benchmarking information.

Independent businesses may have industry benchmarking, but a good franchise system will have not only an abundance of benchmarking information but more importantly, an understanding of what and how these outcomes or measures can and are influenced.

When looking at an underperforming business, the potential franchise purchaser needs to ask the questions: is it a good system, how does this business unit perform against others, what key performance indicators are out of kilter, and can I influence these? Is it sales, a goods management or cost of goods issue, or is it wages or perhaps fixed costs that can be improved?

The franchisee factor cannot be underestimated and if the purchaser is able to align the performance of the businesses KPIs to the systems benchmarking, just a small number of factors could move the needle of profitability from red to black.

Altering return on investment ratios

For a vast majority of businesses, once established, their value is a function of their profitability or goodwill.

Unfortunately, an underperforming business will often sell for less than its asset value.

This creates two opportunities for the purchaser; firstly, they can acquire the business for less than what it would cost to establish it.

There are additional potential cash flow and establishment cost savings.

Perhaps more substantial is the franchisee's ability to improve goodwill and the relationship this will have on business value.

Improved profitability creates goodwill which can create an opportunity for capital gains, for some business this can be substantial and create super return to investment ratios.

Made all the more attractive as in most cases there would be no capital gains tax if or when the business is sold.

Against this backdrop, I am not surprised that certain franchise systems have franchisees that are known as turnaround specialists who have bought and sold several businesses improving them along the way.

As greenfield opportunities shrink in some established systems and as well-established profitable business opportunities decline or command higher prices, I would not be surprised to see an increase in the skilled and less risk adverse franchisee entrepreneurs backing themselves and successful brands to take advantage or franchised turn-around opportunities.

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The world has changed, again!

To start, my assumption that we were entering a period we could define as “post Covid”, was completely incorrect, and should have been post lock-down.

Over a couple of articles written in mid-2020 I made some predictions around the post-Covid 19 economic and social environment and its influence on franchising in New Zealand.

To start, my assumption that we were entering a period we could define as "post Covid", was completely incorrect, and should have been post lock-down mark 1.

We're going to be living with Covid for quite some time, and if international trends are any indication, we are going to be extremely lucky to escape further significant lock-downs.

Having addressed the elephant in the room, let's look at the five trends that I called at the time.

1. Recession

Not a lot needs to be said here other than I was not alone on getting this wrong.
The implication for franchising is that franchising is generally counter-cyclical and it looked at the impact recession has on employment.

Employment had remained extremely high statistically, but bumpy, and this has fuelled a predicted increase in interest in franchising.

2. The best systems likely to be more successful

I predicted good systems would rise like the proverbial cream.

This is evolving and certainly in franchise recruitment circles two lines of questioning have developed over the past 9-12 months – how has the system/category faired over the past 12 months and how did the franchise system support it's franchisees over that time?

Those systems that have done well in these two areas will do well moving forward, I have no doubt.

3. Diversification of models

By diversification I suggested that franchisors would expand vertically through integrating their offering, and revenue base or perhaps horizontally by acquiring or developing additional brands in different categories.

Whilst it is hard to see any significant trend in this direction there have been a number of acquisitions.

But I would suggest that impetuous for diversification has evaporated for many and they are back to focusing on business as usual.

4. New rental and property models

Undoubtedly the e-commerce stream has gone from strength to strength and every business must now include this in their thinking and offering. What we have not seen over the past year is any major re-calibration of commercial rentals or property models.

5. Rise in entrepreneurship

I predicted we would see a renewal in an entrepreneurial spirit, largely driven by a rise in unemployment.

I got the unemployment driver incorrect, but unquestionably there are a growing number of people wanting to be in business for themselves.

They may not have been made redundant, but have decided they don't want to do what they have been doing and now is the time. This interest extends to franchising, which remains perceived as a safer option for first-time business owners.

In addition to what I did predict, there were a couple of significant trends that I did not anticipate and these are now having significant influence.

1. Labour shortages

With the prospect that we were facing a recession, labour shortages did not really factor.
However, a fuller than anticipated employment rate and perhaps more significantly, immigration policy, means that almost all business sectors and industries we speak to have labour issues or concerns.

Franchising is not exempt from this and I am aware it is hampering many businesses and systems, both on an operational day-to-day basis and from a growth perspective.

2. Inflation and supply shortages

Just this month we have seen the release of the highest inflation figures in over a decade, but there are few businesses that would have needed this to be aware that costs of literally everything have escalated over the past nine-12 months.

Added to this are international supply and supply chain issues.

Read: Should I purchase a greenfield or an existing franchise?

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We love the Brands (and people) we work with....

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Choosing a Master

Two additional and significant benefits of acquiring a master versus developing a franchise are the speed to market and the lower establishment and ongoing development costs.

Some of the best-known franchise brands, and nearly every international franchise brand in New Zealand, will actually be master franchisees operating under a master franchise agreement.

The holder of that agreement – the master franchisee, has the rights to operate and develop franchise business units themselves, and or to develop a territory and appoint sub-franchisees under that brand and system. Master franchise agreements can be regional, such as a province, or national.

What are the benefits of purchasing a master?

Acquiring the rights or purchasing a master franchise provides the master with many of the same benefits of buying a franchise system, but usually at only a fraction of the cost of acquisition.

As touched on, many of the masters operating in New Zealand are large, extremely well-known international brands, that in addition to brand power will have proven systems, access to unique products or services.

Two additional and significant benefits of acquiring a master versus developing a franchise are the speed to market and the lower establishment and ongoing development costs.

The franchisor may develop products, services and systems and the master will have access to these as part of their agreement, again most often faster and at a lesser cost than developing themselves.

Are there any drawbacks?

There are a few drawbacks – or I would suggest considerations or limitations – with acquiring and operating a master franchise.

The first and significant limitation that needs to be acknowledged is that the master franchisee does not own the intellectual property. In most cases this will extend to any locally customised or developments to the intellectual property.

There are of course ongoing fees that need to be repatriated to the franchisor. These need to be carefully assessed to ascertain whether the model is sustainable for each of the parties, franchisor, master franchisee and potentially sub-franchisees.

In the case of importing international brands or systems, how appropriate is it for the New Zealand market, is there a consumer demand and will there be demand for sub-franchises?

Lastly, consideration needs to be given to the term or length that the master franchise agreement.

If the master does not have renewal rights they do risk developing and growing a system which ultimately will return to and for the benefit of the franchisor.

Who would a master franchise suit?

Who is likely to acquire a master franchise, and or who is best suited to acquire and operate one?

The first group, and one that we see often in New Zealand are existing franchisors, existing master franchisee and or brand operators.

They understand how to develop and operate brands and systems and they often look towards masters as a way to diversify, take advantage of developing trends or grow their overall business beyond market limitations of the brand(s) they already operate.

The second two groups are less prevalent in the New Zealand market, but I am going to suggest them as the franchise sector develops and matures will increase.

The first of these are existing or experienced franchisees. Usually, they will have operated as multi-site or multi-unit franchisees and are looking at a way to further grow using their experience of operating with-in the guidelines and provisions of a brand.

Critically different to operating as a franchisee, if they are able to sub-franchise they will benefit from the initial and ongoing fees from the sub-franchisees without having to allocate the resources to developing and operating the business unit.

The last group of potential master franchisees, and again one that we are only just starting to see in the New Zealand franchise sector, is private equity groups.

Private equity groups can be strong candidates as their usual business model is a growth model, they often have well experienced management and leadership teams and critically they have the capital that is necessary to truly take advantage of and develop using master franchisee rights.

Read more about Franchising: Should I purchase a greenfield or an existing franchise?

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What are the fees and where do they go?

Franchise Fees ...

A conversation with a client prompted some discussion, in particular what does a franchisee get for their fees and are they good value?

A recent conversation with a franchisor client prompted some discussion and reflection on the franchise model, in particular what does a franchisee get for their fees and are they good value? These are really good questions, and usually the first asked by any potential franchisee after, how much does it cost to purchase?

The answer to what are the fees, varies depending on the industry or sector, and the particular system. But we can look at the typical fees associated with a food and beverage franchise as these generally sit with-in a range. We can then look at where do they go, and what do you get for the fees?

Initial franchise grant fee

This provides the franchisee access to and use of the intellectual property including systems and processes, branding and of course any proprietary products. Generally, these range from $30,000 to $50,000 depending on the system and what is called the initial term, or the period of the franchise agreement.

In my opinion, even at the higher end, this is extremely reasonable and by no way captures the collective cost of developing the franchise system and know-how.

For most systems to get to that point they have invested heavily over a number of years, tested, refined and proven systems and processes and the initial franchise fee is a mere fraction of what it would cost an individual to actually duplicate.

Training fee

A key part of buying into a franchise is learning the business and training a new franchisee is a franchisor's core task. Sometimes a training fee or component is included in the initial franchise grant fee or sometimes separated out as a separate fee.

Good franchise systems invest very heavily in their training programs from both a system and on a personnel basis.

Rarely could the training fee be considered a revenue generator for the franchisor. At best a training fee or allocation from the initial franchise fee is cost recovery.

Where a franchisee buys an existing franchise, they usually pay a training fee to the franchisor. But bear in mind this is not actually growing the number of franchisees or business units.

Ongoing royalties

For most food and beverage systems, the ongoing franchise fees or royalties are based on a percentage of revenue or turnover.

This ranges from a very few systems as low at four percent through to seven percent, with the majority in the middle.

What do you get in return? In absolute terms, this will depend on the system, but will include ongoing access to system developments, group purchasing, which in itself may offset the franchise fees, support and guidance and most importantly use of the brand, recognition of which may be a massive revenue driver.

Group marketing contributions

This is sometimes referred to as Ad-fund. It's important to remember that this is not revenue for the franchisor and they do not directly benefit from it. It is spent on behalf of the franchisees to increase revenue in their businesses.

The franchisor indirectly benefits from an associated increase in revenue through any franchise fees.

Percentages range from two per cent through to perhaps six percent of revenue. Not bad when the old rule of thumb is that you should allocate at least five percent to marketing your business, and they the individual franchisee units benefit from the collective group spend, which is what makes it so powerful.

Technology, systems and special fees

Some systems have either one-off development fees, or special fees to cover the costs of specific technology or systems, are perhaps a specific development program.

Again, these are not usually revenue generators for franchisors and generally offset specific costs in the system for the franchise business units.

And again, in many or most cases the costs may be far lower than what an independent business operator would have to pay.

Are the fees good value?

In my opinion, as a general framework, yes absolutely these fees are good value and they will usually represent a percentage of the costs of an independent business unit to recreate what is provided.

But ultimately answering the question of value will depend on the franchise system, how well-developed and supported it is, whether it has good systems that create quasi-value for the franchisees and associated cost savings and whether or not it has a marketing programme that generates return via increasing brand awareness and sales.

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Validation or Excuses?

Whilst interest in becoming a franchisee entrepreneur is on the rise, we know this will not suit everyone, we suggest robust due diligence process..

Whilst interest in becoming a franchisee entrepreneur is on the rise, we know this will not suit everyone and, as always we strongly suggest a robust due diligence process is undertaken.

However, we are seeing some trends in what people are raising as reasons to not pursue business ownership and I think it's time that we called them out as they often confuse excuses with due diligence and validation.

We will wait and see what happens with Covid

High on the list – if not the top reason that potential entrepreneurs use to rationalise not pursuing a franchised business – is the uncertainty around Covid-19. In fact, every time we have a change in Covid alert levels we see candidates instantly drop out of the process.

The pandemic has created uncertainty, but we are now definitely living in a new normal for now. We have seen the impact of lockdowns; in business we have seen winners and losers and we have some view forward.

But, unquestionably, the world is not going to return to what it was before Covid-19, so waiting for this to happen will be an unending exercise.

High on the list – if not the top reason that potential entrepreneurs use to rationalise not pursuing a franchised business – is the uncertainty around Covid-19.

The due diligence questions should include; what are the opportunities with this particular systems, industry or location driven by the new normal, and what will they look like in the future? How is the system or industry that I am looking at going to be impacted by potential further lockdowns or disruptions?

The economy may take a downturn

Also high up the list of justifications is citing that the economy may trend down. Recently released December quarter results are sure to see this issue raised more frequently.

This isn't a new justification and one I always find fascinating for several reasons.

The economy does go through cycles, so regardless of where it is at any moment, during the life-time of a business it will be exposed to an economy in both growth and decline.

Additionally, and importantly, not every business, system or industry fare the same in different periods of the economic cycle.

What is important is to understand is the history of and/or what's likely to happen over the cycle in terms of impact on the business, system or industry under review.

As we have discussed previously, some businesses do extremely well during downturns.

Unquestionably there are opportunities and risks over the entire cycle, and being worried only over a decline I would suggest is potentially myopic.

Not sure the timing is right

Absolutely, the timing to start or purchase a business needs to be right for the individual, and there are a number of factors to be taken into consideration.

However, many potential franchisee entrepreneurs fail to fully evaluate whether franchising generally or a particular business is right for them, citing the timing.

In my view, it is basically a lazy excuse for not completing due diligence. Are they addressing the real question, namely, is it right for them?

Firstly, if it is truly and solely a timing issue, the buyer may return to it in the future.

Secondly, due diligence can take anywhere from a month to over a year depending on the system or business so an individual's and of course other circumstances could change significantly over that time.

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Should I purchase a greenfield or an existing franchise?

Should a franchisee entrepreneur purchase an existing franchised business or a greenfield/start up franchise?

One of the first considerations for the franchisee entrepreneur is whether they should purchase an existing franchised business or a greenfield/start up franchise?

There is of course no universally correct answer and it depends on the individual buyer, their appetite for risk and their business ownership objectives.

The traditional paradigm has been relatively easy to understand.

The arguments for buying an existing franchise business

An existing franchised business has performance history. A potential purchaser can look at and analyse the performance and make some relatively sound projections around their likely performance moving forward.

Where the franchise component is so important is that a potential franchisee, as part of that analysis, can look at the particular business unit or franchise and evaluate it against others in the system, or the benchmarks – is it performing well due to the franchisee or location? Could they do a similar or better job?

This can also help with funding as history can be referred to. For many, they consider it a safer purchase option.

Even an underperforming franchise can and often is the preference as the price may be less than replacement or establishment costs and may also allow an incoming franchisee entrepreneur to quickly and relatively easily increase goodwill and generate a capital return.

The potential downside for buying an existing franchise business is, of course, how much is the incoming purchaser paying for goodwill?

A more difficult evaluation is how much of that goodwill can be attributed to the particular franchisee versus the brand, and if and by how much this may be eroded.

The arguments for buying a greenfields/start-up franchise business

The ability to generate goodwill versus purchasing it is usually the major driver for establishing a greenfield franchise business.

Usually this means that a start-up is less expensive to purchase than an existing one – particularly a profitable franchise business.

Not surprisingly, the franchisee entrepreneur that is more confident in their abilities and or has a higher risk appetite is likely to lean this way.

The downside of establishing a greenfields business are of course the unknowns – how long will it take to get to breakeven and beyond, what is the magnitude of the opportunity or business?

A less confident franchisee entrepreneur may also be concerned around their ability to build and grow versus maintain a business.

Challenging the traditional paradigm

In the current environment, you are unlikely to be surprised that an overwhelming number of new franchisee entrepreneurs are focused on purchasing an existing franchise business.

Subscribing to the traditional paradigm they are seeking to see history and proven performance, in particular how the businesses have performed over the past six to 12 months.

"The ability to generate goodwill versus purchasing it is usually the major driver for establishing a greenfield franchise business."

It could be considered risk-averse behaviour, but I would suggest that there are several new factors that need to be taken into consideration and perhaps challenge the traditional paradigm.

For example, has the disruption of the past year finished?

The old cliché that past performance is the best indicator we have for the future may no longer apply.

Disruption to some sectors like inbound travel is obvious and acute, but what about businesses that have traded well or even up over the past six-to-12 months – are they still to have their disruption?

Or what about those franchise businesses in either a category of location that have been impacted: will and when will they trend upwards?

How about completely new business concepts where there are no existing businesses for resale?

I do believe that there will be ongoing changes to consumer behaviour, how and where money is spent, category changes, new trends and whole new franchise business opportunities.

These will be both geographically in markets where there may not be existing franchise units and or in completely new markets for new products, services and systems.

So, to answer the question of "Should I purchase a greenfield or an existing franchise business?" the traditional paradigm remains, but it can certainly be viewed through some new lenses.

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Why these could be the Golden Years for Franchisors


Why these could be the Golden Years for franchisors - Bay of Plenty Business News

What about the prospects for franchises themselves and also companies, concepts and business that are considering growth via a franchise model?

I have previously written on when is a good time to purchase a franchised business and asserted that post Covid lock-down, we could see a renewed interest in entrepreneurship through franchising in New Zealand. But what about the prospects for franchises themselves and also companies, concepts and business that are considering growth via a franchise model?

am going to go out on a limb and say 2021 and beyond could be the golden years for franchise development and growth.My reasoning is based around two fundamentals and the factors influencing these: the first being the franchisee market and the second being the economic and social environment.

Without a question the single most referenced and actual challenge to growth in a franchise model is being able to recruit franchisees. Franchisees are the consumers or purchasers of the business model – without them there are literally no franchises.

Significant increases in franchising

We are not at all surprised that in late 2020 and into 2021 we are seeing significant increases in franchisee enquiry.

Over 2020 I outlined what I believed would influence this trend.

This included record high property prices and low interest rates, regional migration, returning expatriate Kiwis and structural employment changes, either forced by redundancies or via personal choices and those seeking lifestyle changes.

The combined effects are filling a franchisee pool to levels that I have not seen in New Zealand in my 20 years of franchising.

Current or potential franchisors may have potential customers, but equally economic and social environment are also ripe for growth.

There is almost daily commentary on record low interest rates and high property prices.

Rising property prices are great if you have or are selling property, and as discussed, if you are borrowing against equity.

Lower interest costs present the opportunity for franchisors or would-be franchisors to have the ability to invest in business units, test innovation and development and/or pass the reduced costs through to franchises by altering traditional fee or cost models.

Rising property prices are also driving down returns from rentals and smart investors will inevitability start to look elsewhere.

Franchise business models that can demonstrate good returns will be desirable and effective investment vessels. This can assist with fuelling growth, and every system needs to grow and get to a certain size to be viable.

Surprising rebound for economy

The New Zealand economy's surprising rebound in late 2020 no doubt has pleased business. Many areas that we are seeing spending happen to have strong franchise brands or sectors.

Whilst conditions for business growth may generally be promising, there is one last and significant reason why a franchise model may fair better versus a corporate model over 2021 and beyond. There is a real and significant limitation on labour supply.

With continued border restrictions adding to the pressure, there may just not be the labour supply for continued growth under a corporate model in many sectors.

Conversely, by the nature of the relationship, franchising re-allocates the responsibility of labour attraction and retention to the franchisee, and in many cases the franchisee provides the labour.

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The "soft" Due Diligence checklist


The ‘soft’ Due Diligence checklist - Bay of Plenty Business News

When we are guiding potential franchisee entrepreneurs there are three key areas we suggest they consider.

As we relax into summer, not only is it the season of family get-togethers and beach barbeques, it is traditionally also the period where many consider their future, how they avoid going back to work in their old jobs in the New Year and what sort of business they should buy.

As the end of 2020 approaches and we enter 2021, I suspect there will be a few more people thinking seriously around whether a franchised business is the option for them.

In previous articles I have discussed the various approaches in regard to due diligence, most recently suggesting that a potential franchisee entrepreneur should start with a motivational analysis, i.e. asking themselves "why" they are looking at buying a franchised business.

My assertion is this is going to assist in guiding a potential purchaser as to what types of businesses they should be looking at. But once they have done this, what are the other "soft" non-financial or legal due diligence items?

When we are guiding potential franchisee entrepreneurs there are three key areas we suggest they consider.

How much time do you want to spend in the business versus on the business, can you manage a business where you may get phone calls at any time any day, or do you need a business where you can compartmentalise your time?

The work-life balance

After all, the elusive work-life balance is the reason that many purchase their own franchised business. In many cases, it's true, you could go for a surf during the day or watch the kids play sport, but the reality is it's going to be your business, and ultimately there is no work-life balance, balancing work being really a part of your life.

The questions then are, how much time do you want to spend in the business versus on the business, can you manage a business where you may get phone calls at any time any day, or do you need a business where you can compartmentalise your time? Are you required to be in the business every day, and for how long?

From my experience, perhaps the number one issue that franchise business owners become dissatisfied with or more importantly, are not successful at, results from them misunderstanding, or mis-estimating the amount of time and effort required in running a business.

Family involvement

The motivation for many in purchasing a franchise business is to spend more time with the family in a family business.

It may come as a surprise that, according to the Franchise Relationship Institute, this motivation is actually inversely related to statistical business success rates.

The due diligence questions here are: have you worked with your spouse or family before, and how will you structure the business?

What will the respective roles be for each family member, how much time and attention will they be required to spend in the business.

And of course, what are the expectations from each family member in terms of remuneration?

People involved with the brand

The cliché is that being in a franchise business is being in business for yourself but not by yourself. This is reassuring. But a franchisee entrepreneur needs to take into consideration the other parties that are associated with the "not by yourself" part of the business. These include not only the primary franchisor and the key franchise support team members, but also other franchisees.

All of these people will have varying levels of contact with the franchisee entrepreneur and impact on their relationship with the brand. This impact can extend to other franchisees and how they manage their own business and represent the brand.

The due diligence process here is to speak to as many people associated with the brand as you can. Do so at the brand or head office level, and also at a franchisee and perhaps former franchisee level. Can you work with these people, are they competent, are they doing a good job by the brand that you are looking at investing in? Can you see yourself doing what they are doing?

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Time to renovate your career?


Refresh Renovations franchise for sale

Refresh Renovations Franchise opportunities,
Buy a Franchised Home Renovation business

The long summer break is well and truly underway and it's likely that renovations will be all guns blazing throughout New Zealand. We are a nation of DIY fanatics and Kiwis love visiting hardware shops and altering their homes. DIY is great for the simple jobs, but if more complicated renovations are required it pays to call in the experts.

Have you ever considered owning a business that specialises in renovations? Worried that you don't have the technical skillset to take on a Renovations franchise - Don't worry if you have no knowledge or trade experience as the Refresh Renovations franchise systems are well established and assist you to confidently project manage the renovation whilst taping into the resources required to do the "doing". Their systems simplify the consumer experience and budget by carefully planning and managing each stage through to completion. This creates a strong foundation for all projects to be cost-effective and accurately priced from the beginning. They are a one-stop shop for all domestic renovation and refurbishment requirements and save their clients' money.

Refresh Renovations are offering franchises to interested investors: perhaps people who have a passion for renovation; or would like to start their own business; or even launch a new career. This is the perfect opportunity for people returning to the workforce to focus their passion, people management skills and strong sales/marketing focus into developing their own Refresh franchise. If you're a hard worker there is potential to grow yourself an exceptionally successful renovation business.

You may not have considered a renovation franchise before; it's not a well-known franchise option. But in this land where people are building up, out and underneath their houses there are many future clients waiting for your team to transform their living spaces into something remarkable. Sure there will be competition from other refurbishment/renovations/building companies, however many of them aren't supported by a worldwide, highly reputable brand like Refresh Renovations. By purchasing a Refresh Renovations Franchise you will join a booming and highly profitable industry.

Are you going to wait another month to activate your New Year's resolutions or get a head start on other prospective business owners by purchasing this franchise and beginning 2021 with an exciting new future ahead of you?

Contact Iridium Partners now to learn more about Refresh Renovations franchises. 

Please note, there are also franchising opportunities with Refresh Renovations' sister companies Zones Landscaping and Oncore Maintenance. Iridium Partners have further details.

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Motivational analysis required before buying

There has been a significant rise in the number of people interested in purchasing their own franchised business in the current Covid-19 economic and social environment.

have previously stressed the critical importance of potential franchisee entrepreneurs undertaking thorough due diligence of the opportunity, including engaging specialist advice from accountants, solicitors and bankers.
We are now seeing a large proportion of first-time business owners, and as such there is an additional level of due diligence required.

However, I'm not talking about the due diligence that can be undertaken or outsourced to the specialist advisors. It's not an in-depth evaluation of the market or the brand. It is far more personal and closer to home – a self-examination of one's motivations for embarking on a journey of franchise ownership.

At the heart of this is a need for what I call a motivational analysis. A good place to start is with Simon Sinek's "Start With Why". Reading the book or just watching the 18-minute TedTalk will provide you with a general overview of why some are extremely successful when others are not.

The same philosophy and approach can be applied to make better decisions when buying into a franchise system and create better outcomes for entrepreneurs. In essence you need to look deeply at why you are wanting to acquire a franchise business.

Map out motivations

By looking at the profiles of franchisee entrepreneurs, we can map out their likely motivations and create a matrix of the type of franchises or business that will speak to their "why" and help you examine your own motives.

There are two most common profiles, so let's look at the kinds of franchise formats that tend to suit each of these. The first group can be called "Plan B-ers".

This group can typically include the recently made redundant, and those returning to work post children. Now, it can also include those who have had a taste of self-determination during lockdown and want to go it on their own.

By looking at the profiles of franchisee entrepreneurs, we can map out their likely motivations and create a matrix of the type of franchises or business that will speak to their "why" and help you examine your own motives.

Their backgrounds will be varied as their skillsets. What is common with a majority of Plan B-ers is inherent in the title – this isn't their first choice, so many will be looking to buy a job and/or some security.

For some of this group they will use the opportunity to make that career diversion into something they always wanted to do. However most will be looking at playing it safe. The safest and most comfortable path for Plan B-ers is to look at their core skill and experience sets and apply these to a franchise structure.

They are usually risk adverse, so well-structured, established systems will suit them best. This could be systems designed around a professional service such as HR, accounting or perhaps property management, if from a professional background.

Home services and or trade-related options may be sought by those from the trades, and perhaps retail franchises if they are from hospitality or retail backgrounds. Other options or systems that have earning guarantees or income protection will be very desirable to this group.

The second group can be described as Twilighters – people looking towards, but not quite ready to retire. Three factors come into consideration with this group.

Preservation of capital is usually paramount, so key issues include how much the system is to buy into, and how safe it is as a business. Their general objective is likely to be protecting an asset base that has been created over a lifetime of employment.

The second consideration is around earnings expectations. Quite often, the motivation for Twilighters is not solely income, but more a desire to stay involved and have a business interest.

The third consideration is much more practical – what's involved with running the franchise, how hard is the work, and how much time is involved to run it successfully.

Combining these three objectives at various volumes produces a match with systems that are generally at the lower investment level, and often those that can have hours and attention varied to suit.

Alternatively, for the well capitalized franchisee entrepreneur, secure high performing capital systems are also a consideration, key factors being their ability to be operated under management and or the ability to on-sell.

We have touched on just two of the why profiles for potential franchisee entrepreneurs, but the commonality with these – or any of the other profiles – and the key to their success is to understand the motivation for purchasing a franchise and seek out systems that are able to speak to your "why".

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Emerging trends and opportunities

Towards the end of each year I write on what I see as the emerging trends in franchising for the coming year. If 2020 has taught me anything, providing predictions is a dangerous preoccupation, so this year I am going to keep the focus a little tighter and answer the question: in the current environment, are there opportunities in franchising?

The simple answer is yes. Let's look at the economic and social environment and then a delve into what sectors and specific industries are currently providing the strongest opportunities.

The economic environment

Generally, franchising is anti-cyclical to the economy. When the economy is upbeat, less people make the jump from paid employment and lower unemployment means there are usually less people looking to start their own business out of necessity.

The recession that followed the Global Financial Crisis (GFC) was unusual as unemployment did not rise as much as previous recessions. Our current recession has already seen an increase in unemployment and an increase in demand to buy into franchised businesses. Is it necessity or opportunity?

We have historic low interest rates, which look to be around for some time and the impact on business borrowing cannot be stressed enough. Adding to this that a significant amount of business borrowing in New Zealand is secured against or funded by equity in homes, the lower interest rates have a double whammy – ie, lower rates on both their franchise business loan and the home loan.

There has however for several months been some query around the banks' appetite for business loans and we are certainly seeing them be more cautious. However, franchises often provide more comfort for the banks due to lower failure rates, their ability to benchmark and they generally know what is and should be happening in a business at any time.

High property prices

The New Zealand mood lifts when property prices go up. The current runaway property market in Auckland in particular is raising some smiles for those already on the property ladder. These are often also the people looking to make the jump into a franchised business, so the triple whammy, added to lower interest rates is an increase in potentially available equity for many.

The figures for the amount of money captured in the New Zealand economy from Covid-related travel restrictions is quite incredible. In spite of the demise of international inbound tourism, in September the New Zealand balance of trade recorded the highest trade surplus in more than five years.

This is a lot of money staying in, and being spent in New Zealand that was leaking overseas. We have read the articles on high end cars sales going through the roof as people cannot take their overseas holidays. There is also a renewed sense of wanting to spend locally. We will come back to how this is playing out.
Promising industries or sectors

So with some of the economic conditions favouring business growth through franchising generally, where are the current hot spots and opportunities by sector?

Essential services

Basically, any services that were able to trade through lock-down have performed extremely well. However, over the past six months, one sector that has gone from strength to strength is cleaning and hygiene.

Traditionally seen as a low entry point franchise model, this category has seen massive increase in demand and opportunities for new franchisees.

As demand matures, brand and delivery will become that much more important and the well franchised, well-managed, marketed and reputable systems will further prosper.

This provides opportunities for not only new entries, but for independents in the industry, including larger firms, to join franchise systems due to high demand levels and benefit from brand awareness, which you could argue was previously largely irrelevant.

Online and on demand goods and services

Already a macro-trend of our times, this has been accelerated by weeks of us being locked at home. For the food and beverage industry this means models that have a strong delivery or pick up model and a technology and perhaps internal delivery platform to match. Sales continue to be strong and defy expectations.

Small footprint, suburban and regional distribution capabilities are also performing well. This bodes well for would be multi-site franchisees that have the capacity to capitalise on opportunities and spread future risk by operating across multiple sites and markets, or perhaps across brands.

Home improvement and renovation

Back to our closed economy comment, there is currently a massive increase in demand for home renovation and improvement services, and long-life durables. Franchised businesses and brands in this space are doing extremely well. In the case of property related, rising property prices tend to encourage people to spend more on refurbishments and improvements.


This year has demonstrated a need to be flexible in so many areas. For many individuals, this flexibility is a new-found interest in achieving a work-life balance. Looking towards franchised businesses that provide flexibility in working hours and/or location, such as a man in a van type business with relatively low ingoing cost, can provide such an option.

At the other end of the investment spectrum and the yet completely unanswered question is the future of CBDs and centralised work.

Flexible work space and decentralized work locations provide a huge opportunity for individuals and landlords. 

So yes, whilst we have some serious dark skies ahead of us, there are plenty of opportunities in franchising.

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Rise of the Franchisee Entrepreneur


Rise of the Franchisee Entrepreneur - Bay of Plenty Business News

How do we define entrepreneurship and what is its relationship with franchising? Let’s start with returning to the definition.

I remember my year 11 economics class and the subject of entrepreneurship; it was described as being "hard to define and even harder to encourage". It sounded elusive and counter to the field of economics where we generally like to be able to define our parameters for everything we study.

How do we define entrepreneurship and what is its relationship with franchising? Let's start with returning to the definition. It turns out my year 11 class was not wrong. Wikipedia allocates nearly 250 words to a definition which includes:

  • Entrepreneurship is the creation or extraction of value.
  • Entrepreneurship is the process of designing, launching and running a new business, often a small business.
  • Entrepreneurship is the capacity and willingness to develop, organise and manage a business venture along with any of its risks to make a profit.
  • The people who create these businesses are often referred to as entrepreneurs.

I am going to summarise and define entrepreneurship as a willingness to, or process of taking on commercial risk, developing and managing a business with a view of creating value, profit or return.

The misperception that franchising stifles entrepreneurship

We have conversations every day with people who want to start and grow their own businesses. They want to take a measured risk, invest time and money with a view of controlling their future and of course, make a return. Without perhaps saying it themselves, they want to be entrepreneurs. Those that have already decided that franchising is their route we call franchisee entrepreneurs. The statistics overwhelmingly demonstrate franchisee entrepreneurs are more successful.

Some budding entrepreneurs however have a misconception that franchising will stifle their entrepreneurial aspirations. I believe this could not be further from the truth, and invariably we have a discussion around recurring themes:

I want to own my own business, not someone else's

Nearly every franchise brochure or explanation that I have seen over 20 years starts with something similar to "be in business for yourself, not by yourself". This is true, franchisees fund – whether directly or through borrowings the business themselves, and the risks and rewards sit solely with the business owner, the franchisee entrepreneur. It is their business – it is not an outlet or subbranch of the franchisor's business.

I want something I can develop, control and influence

That is not solely, but it is ultimately in the hands of the franchisee entrepreneur. If it is a start-up or greenfield franchise business, they obviously need to develop and grow the business. If buying an established franchised business, there is always room to develop, refine and do better. And the best part about franchising is it provides the road map and the benchmarking against which success can be measured.

From over 20 years of research the Franchise Relationship Institute has established that one factor accounts of approximately 40 percent of the success (or otherwise) of a franchised business. It is not the brand, not the location (though both are critical), it is the franchisee.

I don't want to be told what to sell and I don't want to be stifled

Firstly, here is the wake up, "someone" is going to tell you what you should be selling. That "someone" is the "market" – if the market does not want it, you won't sell it. And why would you not want the collective experience, support and guidance of a franchise system to assist you with what you should be selling?

We also often hear people say they don't want their ideas or innovation stifled. Good franchise systems do not stifle innovation, they have the ability to develop, test and roll out innovation, often generated by franchisees. Need we say more than Big Mac – invented by a franchisee, now the greatest selling burger on earth.

I don't want to follow rules

Let's face it, we have rules in business – we must pay taxes, we must follow an extraordinary number of legislative requirements and we must perhaps most importantly, do the things, and follow the rules that will create profitable businesses.

Franchise systems develop processes and parameters, "rules" because they work. Some are designed to make sure the franchisee is able to stay within the legislative playing field. Whilst others are definitely to ensure compliance within a franchise system.

To quote one of my former franchisor managing directors: "The franchise agreement and parameters are designed to keep the good things in and the bad things out."
There is one statement that does separate the entrepreneur from the franchisee entrepreneur – I want to create or develop my own "thing".

These super brave people are politely called pioneers. I believe there is often a confusion between pioneering and entrepreneurship and while they are not mutually exclusive, they are not the same.

You do not need to invent, or revolutionise anything to be an entrepreneur. If you do want to be a pioneer, then franchising is probably not for you and we wish you the best of luck.

But remember that statistically, the franchisee entrepreneur is more likely to be successful.

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Opportunity Knocks

What do the expected recession and redundancies mean for franchising? Simon Lord and Nathan Bonney share some insights

Over the last 10 years or so, New Zealand has had a strongly-performing economy with low unemployment. Although many franchises have grown well as a result, the economy had a negative effect upon franchisee recruitment in some sectors. Increasing property prices made it attractive for people to invest in property rather than in themselves.

Add the fact that business confidence has been surprisingly low since the last election, meaning that people in well-paying jobs have been reluctant to make the jump into self-employment, and you can see why surveys have consistently ranked 'availability of good franchisees' as the number one challenge for most franchisors. Lower immigration levels haven't helped, either.

Well, now all that looks set to change. Traditionally, franchising has always performed rather well during recessions.

For good franchisors, recessions offer a chance to expand: new locations become available; old competitors suffer; and there is a larger market of potential franchisees and staff as people are moved out of declining industries.

For well-supported franchisees, being part of a franchise group offers benefits that an independent business can't: buying power; branding; support; new product or service development; and many other factors – not least, the ability to share ideas and opportunities with fellow franchisees. Truly, there is strength in numbers.

And while large companies struggle to reduce overheads and reorganise, or overseas companies leave the market altogether, the flat and localised management structure which most franchises enjoy means that they are well-placed to grow.

Back to the future

The recession following the 2008 Global Financial Crisis was unusual in New Zealand because unemployment did not increase as much as had been the case in previous recessions. The next few years look more likely to follow the normal post-recession pattern, with more growth opportunities and more financial stimulus following the inevitable initial pain.

Tragically, some franchisees (and many independents) will not have sufficient financial reserves to survive an extended downturn and their businesses will close or be resold. This means that there will be a number of otherwise viable franchised businesses which come on the market and represent good opportunities for those in a position to buy. Buyers will also have a choice of new opportunities and new sites.

The fact that most economists are currently tipping property values to avoid a major plunge in values, or to suffer only a temporary dip, means that people with property will still have equity against which to borrow. In addition, record low interest rates make it possible to borrow more than might otherwise have been the case (although they would be wise to build in a safety margin for rates to increase in the future).

Who's going to buy?

So who's going to buy, and where is the biggest growth going to come from? Well, redundancy is going to be a key factor. While it will affect people across all wage groups, investment levels and industries, a lot of jobs are going initially from the retail, hospitality and tourism sectors. These are people used to working long and sometimes unsocial hours, as business owners do. They also have people and communication skills, which has often been a challenge in franchise recruitment in recent years.

Some won't have a lot of savings, so home-based and mobile franchises and lower-investment opportunities will appeal. At the same time, there are others – pilots, managers, logistics experts – who will want white-collar or business-to-business franchises.

Another driver will be two-job families afraid of redundancy who want to diversify risk by one being self-employed in, say, the childcare, leisure or education field. Following your passion can be very rewarding in many ways, but anything involving compliance issues is difficult and costly to do as an independent – making a well-developed franchise much more attractive.

And franchisors face a new challenge in the form of a group who have rarely entered their orbit before as potential franchisees – millennials. It's only eight years since a demographics professor told a Franchise Association conference that our ageing population meant that millennials would never be short of a job. Now they are, and owning their own business is one of the options.

Wherever they come from, it's important to recognise that this will be Plan B for many people. They might have dreamed of buying a business before but not expected it to happen, or not intended it to happen right now. As a result, they may have good skills but no business experience, which makes a franchise very attractive.

Crossing the border

Immigration may have come to a halt for now, but the number of New Zealanders returning from overseas is increasing again. They will bring valuable skills and experience in many fields, but the lack of suitable jobs (or similar salaries) here may force them to look at business opportunities. Some of those who return will undoubtedly head back to complete their OE when things settle down again, but many will realise, 'We don't know how lucky we are' and decide to stay.

New Zealand's reputation as a 'safe haven' is sky high right now, so when the borders open again we can expect immigration to rise again. Just how immigration policy will be developed remains to be seen, but it can be assumed that migrants with investment capital will be high on the list. In order to meet visa requirements, they will probably have to show how they will create jobs, so larger-investment franchises such as accommodation and hospitality will be more attractive.

Already in the market

There are two other sources of franchise growth. The first is conversion franchising, where existing independent business operators join a franchise in order to take advantage of the brand, buying power and systems they need to help them meet new challenges. That can bring franchisors good new sites and good new people – although training them can have its challenges!

And existing franchisees may see the opportunity to become multi-unit operators. Good franchisees may already have the skills to turn around an under-performing or under-funded outlet, or see the opportunity in a new location. Beware though – multi-unit doesn't suit all business models or all franchisees.

Appealing to buyers

With lots of potential franchise buyers in the market at last, the challenge for franchisors is to attract, recruit and train the right people to build successful and sustainable businesses of their own.

In terms of making the opportunity more attractive to potential franchisees (and their advisors), some areas to consider are:

  • Reducing ingoings. Fit-outs, equipment and training all need to be designed to offer better value for money.
  • Lowering initial fees. While ongoing fees may need to be kept at the existing level to fund support services (which will be more in demand than ever), is it possible to lower or spread out initial fees? It might reduce the contribution to costs from franchise recruitment, but if it helps bring the right people on board for the long term, it might be an investment worth making.
  • Alternative funding options. Where good potential franchisees are struggling to come up with the necessary equity, what other options might be available? Joint ventures and various lease-to-own schemes have been used by many franchisors, while vendor capital (where the outgoing franchisee leaves some money in the business for an agreed period) is also possible with resales. Such options do have to be carefully considered with specialist franchise advisors, though, as any form of finance reduces the profitability of the business.
  • Work or income guarantees. Offering some form of guarantee can provide potential franchisees with some certainty when they first move into self-employment. However, such schemes can lead to friction if the terms are not clearly understood by all parties (see page 16).
  • Paid training schemes. Rather than a guarantee, some franchises provide paid training periods which help the franchisee cover the gap between leaving employment and the time their business starts to generate income.
  • Developing additional revenue streams. The pandemic period accelerated the acceptance of online shopping. Some franchises have developed online sales platforms that reduce overheads and share revenue with franchisees who deliver the product or service in their area.

Ready for the rush

For all the above reasons, we are already seeing a big increase in enquiries for franchises in certain sectors, and that seems likely to continue and grow in the coming months.

Franchisors therefore need to be prepared to handle greater numbers of enquiries than they have been used to in recent years, and to have the systems and processes in place that both help them identify good prospects, and ensure that all candidates receive accurate information in a timely fashion to help them make informed decisions. Good record-keeping and management of the recruitment 'funnel' is also vital for legal reasons.

While good recruitment processes will identify the right people, they will need to be matched by excellent training and support programmes to help new franchisees get up to speed and profitability as quickly as possible – whatever their background.

It will be the franchise systems that adapt best which will emerge from this period stronger than ever with a pool of committed, talented, well-resourced franchisees.

This article was first published in Franchise New Zealand magazine Year 29 Issue 2. 

Simon Lord is Publisher of Franchise New Zealand. Nathan Bonney is Director of Iridium Partners and has many years' experience in franchise operations and recruitment.

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How franchisors earn their keep, and their franchisee’s respect


How franchisors earn their keep, and their franchisee’s respect - Bay of Plenty Business News

Good franchisors have and are standing by with their franchisees in challenging times, often undertaking functions outside their contractual scope of works.

There are a number of traditional reasons why the pundits such as myself spruik the virtues of franchising versus a stand-alone or independent business model. Top of the list has to be the fact that franchised businesses have a higher success rate versus the independent business.

For many, that fact would simply be enough in itself. In my view the three core drivers of this statistic stem from brand, purchasing power and the superior systems often associated with a well-developed franchise system.

Factors such as the brand, market position and marketing allow a single franchise business unit to project itself as larger than it actually is, capturing market share, sales and profitability accordingly.

Group purchasing power harnesses the power of many, delivering to the individual business savings that ultimately translate to margin and increased profitability. And or the ability to be more price competitive and in turn capture market share.

"There are some roles that franchisors never anticipated that they would need to be undertaking, as the cheerleader, the resilience coach and the lifestyle coach."

Franchising is based on a model of doing or performing a business function, so it's no surprise that often a franchised business has operational and business systems and processes far superior to a similar independent business unit.

New approaches in Covid-19

In 2020, all of these elements are as relevant as ever and well-developed, well-supported franchise systems will almost certainly exhibit all three.

However, the pandemic and the ensuing market and economic disruption has created a need and opportunity for good franchisors to work with and for their franchisees and systems in some entirely new ways.

There are numerous stories and examples of franchise systems being able to innovate and implement change in a very short and challenging period.

Innovations have ranged from developing and introducing complete online shopping platforms, to virtual store and business meetings with franchisees, through to product and delivery "pivots" to either fill a revenue hole or capitalise from new market opportunities.

For bricks and mortar-based businesses the April-May (and now August-September in Auckland) lockdown, created literally an untenable situation for many including franchisees where they had rental obligations with no income.

The Government's complete inaction and flip-flopping has meant that franchisors have had to perform the role of tenancy advocate and negotiate with landlords, whether the franchisor held the head lease or not.

In many cases this has literally saved franchisees from going broke. I know many franchisors that have spent 100's of hours both publicly and privately advocating for their franchisees.

And finally, there are some roles that franchisors never anticipated that they would need to be undertaking, as the cheerleader, the resilience coach and the lifestyle coach.

Many franchisors during lockdown were quick to perform business-focused check-ins with franchisees, but as the lockdown dragged on, with no business, this check-in role developed into one of resilience coach, keeping in contact with the franchisees and their families to ensure they did not feel isolated and alone.

I have heard of group Zoom chats, after hours virtual drinks and even a franchisor that sent care packs to franchisees with young children, realising that between home schooling and limited purchasing opportunities, something new was going to quieten the masses.

The well-worn franchising cliché, "be in business for yourself, not by yourself" has never rung more true.

Good franchisors have and are standing by with their franchisees in challenging times, often undertaking and performing functions well outside their contractual and traditional scope of works.

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Established or Greenfields?


Established or greenfields? - Bay of Plenty Business News

The first consideration for a potential franchisee is purchasing an established franchise or starting a Greenfields or new franchise?

The first consideration for a potential franchisee with a particular brand in mind is, do they look at purchasing an established franchise or starting a Greenfields or new franchise? Unfortunately, there is no single correct answer and what's "right" for one potential franchisee will not be for another.

The well-performing existing franchise

An existing business has a number of unique aspects; if bricks and mortar – it is physically there, it can be touched and seen and most importantly it has a trading history. A profitable established franchised business has been through the trials and tribulations and the associated costs of a start-up. The value, and time of getting to this position is, and can often be, underestimated.

The potential purchaser can assess the actual, not the benchmarking or theoretical, financial performance of the business. On the assumption of the business continuing to perform in much the same way, the potential franchisee can plan from day one, including what earnings they are likely to be able to take from the business.

The banks are also able to review and assess the historic performance of the business, and the ability for the business to repay debt. This may facilitate bank funding. Both the bank and the purchaser also have a reasonable market value of the business based on actual historical performance.

The operational aspects of the business can also be evaluated; does the incoming franchisee think they can achieve the same or better performance? Where and how does it rate against other units in the system?
Of course, the value created by the current franchisee-owner is going to be captured in goodwill and reflected in the asking price of the business.

The underperforming existing franchise

What if the particular unit is underperforming; not yet profitable and or has been, but is no longer profitable? Should it be disregarded as a potential purchase? Well for the right franchisee buyer, they absolutely should consider it as a purchase option.

It comes down to three dynamics; the price, the performance of the business against benchmarking and the belief that the potential franchisee has the ability to alter the performance.

Underperforming franchise businesses create circumstances where an existing business can be purchased for less than establishment costs.

A lower investment cost alters the return on investment ratio, often making the investment work for the new owner. But usually, a potential franchisee will purchase an underperforming franchise because there is an obvious upside – eg, if the business is not hitting some or all of the franchise system benchmarks, and or if the potential franchisee believes that they are able influence or alter these.

There are numerous examples of highly successful franchisees that have purchased underperforming units. Some systems even have franchisees that specialise in fixer-uppers.

Additionally, purchasing an underperforming franchise unit may be the only way to get into a particular market.

That being said, the astute buyer would still need to consider the above.

The Greenfields or start-up franchise

Why would a potential franchisee choose and what factors would tend them to lean the other way?

The first is usually cost, and often opportunity. With a Greenfields operation, there is no goodwill. The initial franchise fee for a well-developed and performing system is relatively low versus the accumulated know-how of a franchise.

Franchising provides not only the blueprint for establishing new business units, it should provide a good idea of lead time to reach break-even and beyond.

Once the franchisee has a profitable business, they also have the possibility of re-selling with capital gains. Sometimes establishing a new franchise unit is the only option as the system is not in the market. This could be either a new system or a new market.

There are also the less commercial and more emotive reasons. Some people are intrinsically motivated by the establishment and growth of a new business. It's fun, and for serial entrepreneurs the franchise framework provides a faster development timeline. Many of these serial entrepreneurial franchisees have specific skillsets suited to start-ups and development, versus ongoing running of a franchise business.

Preference, skillset and market conditions

While there is a myriad of factors influencing a potential purchaser's decision or inclination towards a Greenfields or established franchise business, these can be evaluated on both the specific opportunity and also the individual's skillsets and risk profile.

What is critical is doing the due diligence on the opportunity and matching it with the individual. 

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A Darwinist look at the future of franchising


A Darwinist look at the future of franchising - Bay of Plenty Business News

The world has changed. In fact, we have witnessed the impact on human health, we have not even glimpsed the tip of the economic iceberg.

The world has changed. We are not talking summer to winter, we are talking ice age. In fact, I would suggest that while we have witnessed the impact on human health, we have not even glimpsed the tip of the economic and social iceberg that is coming over the horizon.

I have previously discussed the counter-cyclical relationship between the economy and franchising and why the unique traits of this economic iceberg will lead to a new growth of franchising. It should be noted, not all are going to benefit, and we are already seeing glimpses of what successful will look like as we move into this new economic and social environment.

As always, those that change and adapt will prosper, those that do not, will not survive.

Franchise models that were able to continue to trade online during shut-down or by being an essential service benefitted from the initial environmental change, but moving forward, genetic sequencing of the successful franchise species will have similar characteristics.

Best systems likely to be more successful

Having the best burgers, coffee or retail offering will not equate to survival or dominance of the species.

Unquestionably, as unemployment increases, an increased number of people will look towards franchising as their Plan B.

Many would have spent considerable time as employees learning fantastic skill sets, suited to performing a role or job function. They will not be looking at a franchise to learn a task, they'll be looking at a franchise to buy and develop a business. However, their ability to run or manage a business may be non-existent.

Over time, the truly successful franchise brands will be those that have the best systems. Everything from how they manage a recruitment process, how they take someone with no business experience and train, to how they support and develop franchisees to grow their businesses. Better systems also include protecting the brand, and looking forward at the challenges and opportunities.

Capital is a critical component and generally, the more capital intensive a franchise model, the more challenging it is to grow that system. We are seeing a rise in interest in lower investment level franchising. But it is not only the absolute numbers involved, it is the ability to borrow, fund and produce a return on investment.

Franchise systems that can accommodate different funding and capital arrangements and/or produce super returns on investment levels will be more successful.

These could involve any combination of mixed capital models, the rise of the traditional co-operative structure, preferred funding arrangements with banks, through to crowd funding and social capital investment schemes.

New rental and property models

We have seen an immediate swing away from bricks and mortar businesses towards mobile and work from home. Suddenly having premises and a lease has become a potential and significant burden. Conversely, those without premises, and associated cost, have fared reasonably well.

Capital is a critical component and generally, the more capital intensive a franchise model, the more challenging it is to grow that system.

However, there will always be businesses that require a physical presence. Models that do not tie a franchisee to a traditional extended period lease, and or models that are able to provide a flexible rental or property model for franchisees, will unquestionably be favoured in the short-term and benefit from growth. And these will potentially be more robust and successful over time.

Hamburger chains selling bread and milk and high-end restaurants delivering cook your own food boxes are perhaps extreme examples of the now almost cliched "pivot" approach to diversifying income streams and even the concept of the business.

I would suggest the need for franchisors to protect income will encompass both the aforementioned change in product or delivery model at a unit level and perhaps more importantly, their need to insulate and diversify income. This will often be intrinsically linked to the franchisees income. This may involve multi-brand and multi-concept ownership, or vertical integration including distribution outside the franchise system.

It might be cold outside. But do not worry, the franchise business model won't just survive the cold, some will adapt and thrive in it.

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Franchising can help entrepreneurship renewal


Franchising can help entrepreneurship renewal - Bay of Plenty Business News

Growth of entrepreneurship through franchising will go hand in hand, and I suggest that franchising will both accelerate and take a starring role.

New Zealand, at heart, is a nation of entrepreneurs. The tyranny of distance, added with the old number 8 wire mentality has created many a commercial endeavour. The economic and social conditions post COVID-19 will stimulate and feed this national inclination. For many the inclination will morph into franchising.

Why we will see a growth in entrepreneurship

Entrepreneurship – the propensity for people to go into or create a business for themselves – tends to be anti-cyclical to the economy.

This sounds counter-intuitive, but good times and full employment, coupled with a comfort level in the status quo, means fewer people are inclined to take the jump to business ownership.

At the other extreme end, which unfortunately we are now facing, with a recession and significant growth in unemployment as well as under-employment, many will have that push. The post COVID-19 recession will be very different to previous downturns.

Interest rates are low, many would-be entrepreneurs have created equity in property and at this stage they have access to capital.

Also, importantly, the world has suddenly got a lot smaller. Globalisation of the labour market has suddenly ceased.

We are looking at a potentially massive social shift. Few people knew what WFH stood for, or even considered this an option a few months ago. As the workforce has had to come to terms with this new way of working, a great number of people will be reluctant to return to the daily commute, the stipulated hours and work environment. Many have tasted having a greater control over one's day, work and ultimately their own destiny, and will look at exiting the corporate world.

Why franchising will champion entrepreneurship

Growth of entrepreneurship and the growth of franchising will go hand in hand, and I suggest that franchising will both accelerate and take a starring role. Franchising provides opportunities to use almost any existing skill set. From cleaning to home loan brokerage, to building and hair styling, there is a franchise system that provides a traditional employee the opportunity to go into business for themselves applying their existing skill set. If the decision to go into their own business has been one of necessity, this will be highly desirable for many of them.

A franchise system or framework provides the business tools, systems and support around a skill set, turning it from a job function to a business.

The business in a box approach means the incubation period for a start-up franchise business is likely to be shorter than a stand-alone and an established brand and marketing machine is likely to lead to a shorter period to break-even and beyond. Faster will translate to more growth.

The old franchise saying of being in business "for yourself, not by yourself", has never rung truer.

The safety net and support of being in a franchise is no doubt being felt by many at the moment.

Not only have franchisors sought to support their franchisees, New Zealand's franchise community has collaborated to seek out cross-industry solutions.

Moving forward, franchise systems will have the skill set and resources required to pivot and capitalize on the changing environment, outpacing the individual or corporate business.

The post COVID-19 New Zealand economic and social environment has created ripe grounds for entrepreneurship and the growth of the traditional New Zealand owned and operated business.

That could be the perfect environment for planting the seedlings provided by franchising.

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3 Areas where Franchisors can make positive steps to deal with COVID-19's impact

It is fair to say, it is this week that COVID-19 really hit home in New Zealand. The franchise sector is no different, and covering so many, mainly small businesses, employing over 124,000 people, collectively there is a lot of concern.I do not think that anyone has seen or has foreseen disruption to the level that many are envisaging.

We should all follow the guidelines on how to slow the spread of the virus but we should also be looking at how we can flatten the franchise sector's "impact curve", limit the damage and speed the recovery.

If there are positives out of any of this, they are that we can look towards, learn and share what is happening in the franchise sector and what franchisors are and should be doing.

1. Communicate

Now is certainly no time for franchisors and franchise leaders to be quiet. Make some calls, risk sending one too many emails and or Facebook / LinkedIn posts to your customers and stakeholders.

Most franchisors would have correctly started by communicating with their head office teams.They themselves need to feel secure not only in the face of the virus but also the potential impact that it will have on the business and their livelihoods.Franchise support teams need to feel they have support from the top down, they are likely to be the facing franchisees and even the well experienced ones will now be dealing with new challenges.It goes beyond the initial email or discussion and should be every day, if you have teams working remotely, start the day with a 5 minute virtual huddle via zoom or skype meeting.Think about how you can safely maintain contact with franchisees and continue visits.Some systems are splitting teams and keeping remote teams away from head office.

Franchisees will be looking towards their franchisors for support, guidance and re-assurance. Good franchisors are not only in constant communication with their franchisees, but ensuring that they are providing updated information that can be distributed to franchisees' teams, and most importantly customers. Brands need to be owning and taking the lead of communications with customers as much as possible.Now is also the time for franchise advisory councils to be stepping up and assisting with communications with-in the system.High up the list of things to communicate should be the Government Business Support Package, every franchisee should be looking at this now.

Pro-active franchisors are engaging with their larger stakeholder groups. Depending on the industry this will include, banks, landlords, and most importantly and not to be forgotten, industry or trade associations and colleagues. The Franchise Association of New Zealand is looking at avenues to maintain interaction with members including virtual sessions and workshops on topics of interest and assistance to members. And yes, colleagues include your brand competitors, right now they are facing the same issues and are most similar to yourself.

Lastly, there is a huge amount of press and industry information, do not get media overload, but work on keeping abreast of what information is available, scan it, share it. 

2. Keep business open!

To be clear I am not advocating that anyone risks making others sick and or disregards any official advice but, we need to keep doing business!

However, franchisors should be looking at every opportunity to keep "the doors open" on their franchisees businesses.Iridium Partners works closely with a number of food and beverage brands, an industry that is already facing a plethora of changes. For them it is being proactive in communicating with customers that they are open and taking steps to protect public health, expanding pick up and delivery services and focusing on digital platforms.Even for non food and beverage it's about moving as much as possible to digital and online. Get "business" to where customers are, if they are going to be home, work on getting it there. If your current format does not fit this model, change it.

I am aware of a number of conversations that franchisors are already having on behalf of franchisees, whether affected now or potentially in the future. As a sector and economy, we have never been more in this together. There needs to be dialogue on everything from franchise fees, rental holidays, bank loan repayment scheduling and just about anything else that keeps money moving.

3. Stay calm.

As I said at the beginning, franchisees will be looking for leadership from franchisors perhaps like never before. Remember that it won't last forever, but there is no doubt that it will change the economic and franchise landscape.Stay Calm, make and communicate your plans and look after your people. Looking after starts with checking in and making sure that they are ok, there is so much disruption and concern already. Let's flatten that "impact curve".

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The importance of walking the talk

I am continually amazed at what appears to me to be a growing gap between what people say and what they actually do.

In the business world one would expect it to be relativity simple, be clear on what you are offering, and deliver on that. Walk the talk – or just do what you say you are going to do. In other words, deliver.

These gaping holes appear everywhere. From how long it takes to get a cup of coffee and the quality or lack of said coffee, through to having supposedly customer-centric large companies address customers' issues.

What's this got to do with franchising? I believe the franchise business model can address the delivery of walk the talk in a number of unique ways.

Franchise systems provide frameworks

Franchising involves the systemisation and documentation of a business process, service or product.

To be successful as a brand, a franchise system needs to be not only be good at, but able to reproduce the process, and train others to do it. Reproduce, refine, develop.

A franchise is also more likely to monitor feedback and use it as a proxy measure of customer delivery versus solely revenue. Whatever it is, chances are that it will evolve over time and benefit from group learnings.

The franchise mind set

As a business model, franchising is not for everyone, but a successful franchisee will be one that is able to follow a model or process.

This starts at the beginning when they apply for or examine a franchise business. The franchisor is able to see quickly whether or not the franchisee can follow an application process. If they can follow the systems here they are more likely to follow the systems that are designed to walk the talk in the business itself. The franchisee picks up the system, and one supports the other.

Human nature helps. As competitive individuals, franchisees often share and compare information on performance, which leads, no great surprise, to improved performance. Corporates may have similar benchmarking, but for franchisees it's far more personal, which leads us to the last area where they have a great incentive to walk the talk.

Everyone has skin in the game

Here's the big kicker and it's a factor that is very difficult for a corporate model to emulate. A franchisee has a personal and vested interest to deliver.

Incentive programs, KPI's and the like cannot reproduce for an employee what the personal skin in the game provides for a franchisee. It's personal – their livelihoods depend on it. They are closer to the customer interaction and as such more motivated to walk the talk.

Add the next layer to this. A good franchisor will ensure that the franchisee is walking the talk. They will receive coaching, training and if ultimately, they are unable to walk the talk, the franchisor will assist them in walking along.

I am not saying that a franchise business is going to deliver the goods each and every time, because obviously there are multiple factors involved.

However, starting with a systemised approach for a business that has already proven that it works, delivered by an individual that has a personal interest in delivering well on the business offering, sounds promising to me.

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