How to get the best deal when buying a franchise

The old saying with houses is that you make your money when you buy. The principle being, what you pay will influence your return when you sell. Pay too much on the way in and it will be difficult to obtain a gain on the way out.

Similar dynamics apply to buying a business. What you buy and for how much will definitely influence the future sale price and the return on investment when sold.

However, when buying a business there is much more to consider than just the price and location.

And with a franchised business, there are additional factors that will influence the future return on investment.

These factors create opportunities.What are the secrets and tricks and tips that nobody tells you?

Understand the market
Instead of questioning if there is a current market for the business – ask will there be one in the future?

To reference the all-time classic example: back in the day Blockbuster Video franchises were hot.

They made a lot of money and accordingly the entry and resale prices were significant.

Technology played its hand here, significantly changing the market and the value of the individual and overall franchise businesses.

We also need to consider other socioeconomic trends and where we are in the economic cycle and how it relates to the business.

There are always winners and losers at each stage of the cycle. Understanding the cycles and trends may help you pick what's trending up, or down and spot an opportunity.

Brand
A brand's position or its perception will influence sale and purchase pricing. What opportunities does this create?

The logic is that a category or brand leader may present the best opportunity to obtain a return on your investment through higher sales and market position.

You are likely to pay for this in goodwill if buying an existing business and potentially through a higher initial franchise fee than if it was a greenfield business.

However, challenger brands may represent a good opportunity for a higher return on investment.

A well-resourced and aggressive challenger has room in the market to grow and carry your business, and its value with it.

Look further than the Profit and Loss statement
Essentially, existing businesses are valued by a multiple of their earnings or profit.

I would suggest that to maximise your return on the investment opportunity when buying a franchised business, you need to look beyond the profit and loss statements.

In addition to the market and brand issues above, look at the sales trend line over the life of the business.

Have profitability changes been driven by management of the business or sales? Look at the performance of the business against the franchises' benchmarking information – are there opportunities to improve performance and ramp up the return?

Another property analogy: the best house in the worst street fixer upper approach also applies.

Look for underperforming franchises in good brands. Is it user error or market location? If the former, this may present potential to purchase an underperforming asset, and with it perhaps the largest opportunity make to money.

Negotiate the best deal
Finally, you need to understand what you can, and what you should not, try to negotiate with the franchisor.

There is a tendency for people to critically look at the franchise fees and attempt to negotiate these as a way of saving money.

The franchisor needs fees to run, develop and market the system. Assuming the business stacks up overall, they are a cost of doing business.

However, you may be able to negotiate your entry and exit costs, renewals and transfer obligations.

There is also significant potential in being able to negotiate territory expansion rights. Equally, be aware of refurbishment and re-development costs.

These are essential to ensuring brands remain fresh and current, so are required at some stage.

Again – as in selling a house – evaluate your potential return on investment and whether you will be reselling a fixer upper, or a fully renovated operation.


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For love and money

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For love and money - Bay of Plenty Business News

Everyone will tell you that going into business by or for yourself is hard work.

Everyone will tell you that going into business by or for yourself is hard work. Many choose to do so with the support of a franchise system. What motivates people to go into a franchise business? Towards the top of every list or survey are three areas:

1.Financial independence – the desire to either make money, more money or to have control of one's income and financial
situation.

2.Freedom – we have all seen the adverts and had the dream – stop working for the man and work for yourself. Self-determination is a major driver, to follow an interest or do what you want to do.

3.Working with family or loved ones – this also rates high up the list of why people start or go into a business of their own.

Which of these motivators lead to or are related to success?

Let's start with the working with family or partners proposition.

In franchising, the statistics are overwhelming: a family structure that is supportive towards the business is a key success factor1However, the success statistics for actually working with family are definitely mixed. That leaves us with love – the desire to do your own thing, and money. Which do you pursue, for love or money?

Start with a simple question.

Can you see yourself in the business or franchise, will you be motivated to get out of bed every morning, will you actually enjoy the "doing"? If not, then move right along. Money alone is not going to work for you, otherwise you probably would have kept that steady income. If you can see yourself being happy "doing", then choose the brand that best represents the doing for you. You would have found your brand passion. Without it, success is highly unlikely.

I'm most certainly not a Millennial, but Simon Sinek's Start with Why2 resonates. Why, speaks to more than happiness, it speaks to purpose, to passion. The real reason behind the what and the how. I buy into the belief that this matters more than anything.

In the context of a burger franchise, Sinek's view would explain; the what is "we make hamburgers", the how would be "using the freshest and finest local ingredients we could source". But the why, to "lead the way for delicious healthy food in the burger market" will be the most engaging element, and the real driver for franchisee, employees, customers and ultimately success. No mention of money? Employees are unlikely to be motivated by your desire to make money, your customers most definitely will not. Why, is the universal reason to believe. So am I saying don't worry about the other elements, or that the money doesn't matter? Absolutely not, and again this is where franchising can play to its strong suite. Franchising can provide opportunities to match your passion, or why element, with a proven business and turn the passion into money.

How then do you prevent the pitfalls of love?

Do your research to find your brand passion. Do and check the numbers. Work out what you need to earn and ensure that the system can produce it. Seek and take professional advice.

It is possible to have the love and the money.

1 Franchise Relationships Institute. 2 Simon Sinek – Start with Why 2009


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Run Together

Last week I happened to be running through Christchurch, dwelling on my learnings from the recent Franchise Association of New Zealand Conference, and in particular what makes being part of a group valuable.

Against the Christchurch background I thought of the African proverb – If you want to run fast, run alone; if you want to run far, run together. Running together is running in association. Association has certainly helped Christchurch rebuild and move forward. However, we can all benefit by being associated with others with similar needs and interests.

Formal associations include franchises and cooperatives, industry and sector associations, chambers of commerce, and business networks.Informal associations are people bound by ideas or common goals. In all its guises, association generates collective wisdom and collective power.

Collective wisdom is knowledge created by and shared by individuals and groups. Association collects and distributes the information and knowledge related to that group's interest in a number of ways.

Best practice is a term used by many to define how they wish to operate. To define best practice for our business, we need to understand what that involves, and this requires data across a range of fields. Only through the collective wisdom generated in association with others are we able to define what is best practice.

Professional and industry experience is gathered over time in an ever-expanding pool.

Industry trends and developments can often be difficult to keep on top of when you are running your business day to day. Again, it requires shared and collated data. Legislation and regulation, like industry trends, can also be challenging to stay on top of and up to date about.

Perhaps most importantly, and the reason that many join a formal association, is that the speed of learning and growth is accelerated by accessing the collective learning and development experiences.

Collective power. The essence of collective power is that a group can assert greater influence than individuals. How can this power be flexed?

Creating and promoting a brand. Brand decisions influence almost every aspect of our lives. Franchises are brands, as are industry organisations, as it the local rugby or surf lifesaving club. They all have a group identity or a brand. This makes promotion, communication and marketing all that much easier as people relate to and identify with, and ultimately make decisions based on brands. By simply being part of the brand, a lot of that hard work is undertaken for you.

Almost every franchise system will tout their group purchasing power over individual businesses. Likewise, most chambers of commerce, industry groups and professional associations will have areas of purchasing power. In some instances, the benefits can be significant and provide a real competitive advantage.

In a world where legislation and regulation are increasingly prevalent, having a voice is vital and ensuring your voice is heard and protected is critical. Accordingly, advocacy and representation are high on the list of functions for many formal associations.

Whether formal or informal in structure, there's great benefit in being associated with others. So I encourage you to join, be active and take advantage of the association(s) available to you in your region, industry or sector. Let's run together.


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The career path less travelled

Everybody remembers their first job. And the learnings are hard-wired into our subconscious. Amazon's Jeff Bezos jokes that his first job taught him how to crack eggs one handed. More seriously, I suspect that his Saturday mornings actually taught him each of these top 10 basic job skills:

  1. The importance of time management and of sticking to a schedule.
  2. Attention to detail.
  3. Attitude is all important.
  4. The value of money and earning it.
  5. Communication skills.
  6. Customer service skills and how to keep a customer satisfied.
  7. How to deal with new problems and the unknown.
  8. Learning in new ways and the importance of continued learning.
  9. That work and business is complicated, and systems and processes are required to be successful.
  10. Hard work and going the extra mile trumps smarts nearly every time.


New Zealand franchised businesses directly employ more than 124,200 people. More than simply providing first time employment for many, franchising's contribution to training, education and career pathing for many New Zealanders is staggering. A first job clearing tables or selling shoes may well help tick off our skills checklist. Some employees then move onto other employment or education. But for others, franchised employment can and does provide a continued career path.

In addition to basic job skills, franchised employment often provides training opportunities from skill or brand specific to formal qualifications underpinned by NZQA (New Zealand Qualifications Authority). Unit standards and qualifications as diverse as a unit standard using a point of sale system, or a National Certificate in Hospitality if working for a café, restaurant or hotel brand, through to The New Zealand Diploma in Financial Services for financial advisers, are among just a few of the options. Training, experience and qualifications can open the doors to higher positions and a career path, all within franchised employment.

True, these skills and qualifications may be gained through corporate employment. However, there are two very specific reasons why following the path less travelled through franchised employment should be recognised and given greater consideration – the scale and nature of New Zealand business, and where you want to head on your career path.

Many franchise systems have developed their own training programmes across the skill and qualification spectrum offering opportunities to upskill and achieve national qualifications while working and earning money. A franchised business operating within one of these systems is able to offer and train staff and provide opportunities, whether they be in Greymouth or Grey Lynn, which as independents they would struggle to afford to or manage to deliver. Additionally, many of these industries simply do not have large or even corporate players, so that learning and development structure is provided by the franchise system.

The second reason is that New Zealand really is a country of small and medium-sized enterprises. We're a country of entrepreneurs and small businesses. Large corporations are different beasts and if your end goal is to successfully run your own SME, then learning the ropes in one is a far more appropriate grounding. As a franchised employee within a well-structured learning and development environment, you can learn the skills and obtain the qualifications. More importantly, you get to see SME business up close and personal, and can gain a better understanding of, and be better prepared for, your own business ownership.

Franchising in New Zealand is doing a fantastic job training and developing many Kiwis. That can range from the first "jobber" that funds their law degree flipping burgers during university holidays, to the one who stays and works their way up to one day open their own business. Franchised employment should be recognised and encouraged as a career path well suited to the New Zealand way of life. 


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Disruption – the innovator’s dilemma

Among the most used and coveted business buzz words are disruption and disruptors. Unlike my 3rd class report card, which stated "Nathan is a major disruptor to the class", being a disruptor in businesses is highly commended.

As a business term it is credited to Clayton Christensen's 1997 work The Innovator's Dilemma. Christensen defined the concept of "disruptive innovation" to describe how individuals or companies are able to succeed by foreseeing and satisfying future needs or unexpressed demands, effectively unbalancing the status quo along the way.

Companies such as Uber and Airbnb are classic recent examples.

However, some older brands were and continue to be major disruptors. Examples include McDonalds, the first to incorporate Ford production methods into retail food, and pizza chain Dominos, reportedly the first company in Australia to offer home delivery. Dominos today declare they are in the technology business not the pizza business. Their market share and parent companies' US stock value reflect this approach.

You may have noticed that many disruptive brands operate within a franchise business model. Is there a link and does one support the other? I believe there is and put it down to three factors: limited resources are not a limiter to success, the duality of the franchise business model, and finally the fact that franchisees are often early adopters.

Disrupters are not limited by resource constraints. Airbnb, the world's largest accommodation provider, does not own a single hotel room. Franchising is based on expanding a sound business concept using other people's resources. As such there is absolute synergy between having a disruptive business concept and franchising as a path to growth.

A successful disruptive business concept, which may already be largely free from capital constraints, can expand exponentially by taking advantage of a franchise growth model.

The nature of franchising, where the franchisor develops the system, and the franchisee runs their business within that system, is a fertile environment for disruption. Innovations can be visualised, created and tested by franchisors not constrained by day-to-day business.

Franchisees can be great disruptors, generating ideas that franchisors have the capacity to refine and roll out.

The Big Mac – created by a franchisee – is the classic example. Good franchisors recognise they not only operate in an environment ripe for innovation and disruption, but also know that their long-term success, and that of their franchisees, is driven by innovation and disruption. They need to think of new ways to do things, new products and services and to stay ahead of the curve.

The final component that demonstrates franchising and disruption go hand-in-hand is in the very nature of many franchisees. Most, even the ones that declare they are risk adverse, are early adopters, which is critical to the success of disruptive business. They pick up someone else's business concept, investing their time and money to expand it. They are the proponents and drivers of disruptive business concepts in whatever market or sector that they operate.

We need look no further than Beyond Meat to demonstrate the strong links between disruption and franchising. Beyond Meat produces plant-based protein targeting traditional meat not vegan markets. Recently listed, it has a US stock market capitalisation more than NZ$5 billion in spite of ongoing loses.

In the US, Beyond Meat is now destined for use in Burger King and Carl's Junior, and competitors are chasing similar plant-based protein for their burgers. These burger franchises built on the back of beef are disrupting their business while providing a significant distribution model for Beyond Meat.

In New Zealand, we have Burger Wisconsin introducing plant-based protein to their offering, and they are sure to be followed by mainstream brands. So be aware of the possibilities that disruption can open up for a franchise system.

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Why some succeed and others fail

Why some succeed and others fail
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Why some succeed and others fail - Bay of Plenty Business News

It has been seen many times. The latest franchised business opens its doors, only to close them within months.

 It has been seen many times. The latest franchised business opens its doors, only to close them within months.

Like all businesses, franchised businesses do fail – though at a statistically lower rate. But why do some franchised businesses fail when others succeed – what makes a franchised business successful?

We can explain this by adopting the analogy of a three-legged stool. We know if a leg is missing or dodgy, the stool falls over.

So let's look at the three legs that can help make a franchised business succeed.

The brand

When we think brand, we think product. However, when we are talking about a franchised business, there is a lot more than the consumer-facing offering that constitutes the brand.

It includes systems and processes, and supply agreements, through to the training of franchisees and staff.

Franchisee support and marketing are also critical success factor.

Finally, the softer elements – the company culture and psychology – matter more than you might think.

It would be easy to attribute success, or failure, solely to the brand. In other words to a poor offering that lacks significant market appeal.

Yes, this often can be the case, as evidenced by whole systems failing or disappearing from the commercial landscape.

The linkage to failure when a brand is not well-designed, or well-delivered is obvious.

However, this does not explain why we have individual site or franchise failures in very successful brands.

There are other key factors at play – the other two legs.

The market positioning

Well-established brands will have known success indicators, which can be matched against statistical socio-economic data when evaluating a market in which to establish.

Market positioning also includes the physical location. Some obvious positions work, such as cafes on the going to work side of the road, fuel and takeaways on the going home side.

The wrong side of the road can literally break many franchised businesses. Also obvious is the impact of timing and trends, including seasonality.

A retail surf shop that opens in April may not make it through winter, whereas the same business opened in October could be extremely successful.

There are also other less obvious market positioning factors, such as direct competition offering the same or similar product and services or perhaps alternatives.

Any of these factors can result in even the best of brands not surviving if they are in the wrong location, the wrong market or even if established within the wrong time frame or period.

But why do some franchised businesses work really well and then suddenly disappear?

Or perhaps harder to explain, why do some seem to initially struggle and then become extremely successful?

The franchisee factor

It's no surprise to learn that the third leg of the stool for a successful franchised business is the franchisee. What is surprising is the extent to which the franchisee influences success.

Research conducted by The Franchise Relationships Institute suggests that the success or failure of a franchised business can be influenced by the franchisee by as much as 40 percent.

This doesn't negate the value or importance of the brand or market positioning, but it does highlight the importance of a franchisee being aligned with the brand and their ability to use and implement the systems at their disposal.

The three legs supporting a successful franchised business may need to be equally strong, but do they carry the same load?

From time to time the weight may vary, but each leg is critical for an individual franchised business to be successful.

This needs to be remembered and considered by all stakeholders – franchisors, franchisees, landlords and all financially interested parties.

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3 - future proof heritage franchise brands

3- Future proof heritage franchise brands

Interesting Inside Franchise Business article touching on Hog's Breath as one of the recognised heritage brands and how they are future proofing themselves so they can continue to sustain growth - Hog's Breath is coming to New Zealand - chat to us today about how you can be part of this great heritage brand.


3 - future proof heritage franchise brands - Nick Hall

Franchising is an all-encompassing sector that has seen its fair share of fad ideas and market trends. Wade through the sea of bygone ventures and you'll find the mark of tried and tested franchise model is longevity.

Whether it's a brand that has celebrated a long stretch in the public eye or received a number of independent accolades, heritage franchises represent stability and support.

But don't be fooled. A heritage brand with success overseas will not necessarily guarantee results in Australia.

It is imperative as a prospective franchisee; you research your desired franchise's history in the domestic market. Brands born in Australia have built their networks according to the specific regulations that govern the country.

Here, Inside Franchise Business takes a look at three home-grown heritage franchise brands who are future=proofing their franchisees.

Hog's Breath Café

Casual dining steakhouse Hog's Breath Café has carved out a niche for quality fare in a family environment.

This year, the home-grown hospitality business celebrates 30 years of operation; no mean feat in today's changing QSR landscape.

Ross Worth, Hog's Breath CEO believes the key to continued success for the heritage franchise is its ability to embrace new technology.

"What we could have never anticipated 30 years ago is the massive shift in technology, consumer expectations, sustainability and marketing that have driven our industry," Worth told Inside Franchise Business.

"Consumers these days demand more from their restaurants and food providers, which has forced the industry to up its game, which is a great thing. If you don't adapt to what the market wants, you simply get left behind," Worth said.

Over the past few years, Hog's Breath has introduced a quick-service model, Hog's Express as well as implemented a model food-truck business and strengthened its operating systems.

Read more at https://www.franchisebusiness.com.au/news/3-future-proof-heritage-franchise-brands/

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3 future-proof heritage franchise brands | Inside Franchise Business

The mark of tried and tested franchise is longevity. Heres three heritage franchise brands who are prepping their networks for growth through innovation.
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Trends to watch this year

New Zealand tends to follow macro trends happening overseas and the franchising sector is no different. However, our unique geographic location in the world, our outlook on life and the fact that we are a nation of SMEs produces some interesting local twists and focus. Here are what we see happening and some areas to watch on our near horizons.

Multi-brand franchisors
As the franchise sector matures, a number of franchisors and systems that have been around for upwards of 20 years have grown as large as the market can support.

Increasingly we are now seeing franchisors expand and develop systems that are distinctly different to the categories or businesses they operate in.

We expect to see this trend accelerate with established franchisors spreading into new categories and businesses where they can apply their capital, skill and network growth experience.

Multi-site and multi-brand franchisees
We expect to see growth in the number of franchisees that operate more than one location or franchise, called multi-site franchisees.

An increasing trend in the US, which we also expect to see here, is an increase in the number of multi-brand franchisees, or franchisees that operate businesses across brands.

In our regional economies – where geographic restrictions may prevent franchisees from expanding to become multi-site franchisees – the possibility of becoming a multi-brand franchisee allows them to utilize their local understanding, and perhaps gain economies of scale by sharing resources.

Health and well-being
Well-being is definitely not a new concept. It has been a hot franchising category for some time.

In the hospitality area we will see continued demand and development for food and beverage brands with a focus on freshness and health.

The fitness category will continue to expand from new types of workouts to offerings focused on the kids' market and mirco-franchising in the personal trainer and well-being spaces.

Demand is consumer driven and by potential franchisees that want to feel they are contributing to others well-being and develop a life style business.

Environment
The tide change on plastic bags is just the beginning, expect to see new categories, new services as part of a move away from packaging and a general environmental focus.

Consumer demand will also be coupled by savvy investors that spot opportunities.

Plant based food will be a category to watch as it becomes mainstream.

Technology
Disruption and technology is the macro-trend of our times.

Food delivery has disrupted the traditional bricks and mortar-based food and beverage model like nothing else.

We are already seeing the rise of the ghost kitchen.

Will we see the rise of ghost brands, where there is no physical contact with the market?

Combine this concept with multi-branding franchising and issues of margin, wage and rental pressures and there appears to be a massive opportunity. Watch this space.

Shared and gig economies
Trends will include micro or small investment franchising or systems that people are able to bolt onto either an existing business or their own skill sets.

These include personal and professional services.

Also expect to see some larger capital-based developments like the franchising of shared office space.

And don't forget traditional standbys
But while we are looking forward at the new, the disrupters and innovators, keep an eye on the established and traditional brands and categories.

There are often very good reasons for their longevity.

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Use the Force for good

Use the Force for good
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Use the force for good - Bay of Plenty Business News

As in Star Wars, we are surrounded every day by the force - in this case, the force of franchising.

 As in Star Wars, we are surrounded every day by the force – in this case, the force of franchising.

Franchising is an impressive contributor to the New Zealand economy: 631 systems, 37,000 individual business units employing more than 124,000 people.

Growth of the sector over the past five years is equally impressive, with total sector turnover growing from $30.8 billion to an estimated $46.1 billion.*

But why is the force of franchising so strong and why should we consider it a force of good? Let's look at it through three distinct lenses, as consumers, investors and from a social perspective.

As a consumer, it is hard to think about an area of life that does not directly or indirectly involve franchising, from food to petrol, housing construction and real estate, even our mail delivery.

Franchising is usually associated with brands, which as consumers we love.

They provide an unwritten contract to meet our expectations, making for easier purchasing decisions, and in many instances providing us with better, less expensive and more consistent products and services.

These are, I would argue, all good things.

On an individual business unit level, franchising extends beyond the local branded café, or burgers to all sorts and sizes of businesses.

Compared with standalone businesses, franchises have a lower failure rate, often reach the breakeven point faster and benefit from a pool of experience.

The cliché of being in business for yourself, but not by yourself, holds true.

Moreover, franchising benefits a spectrum of investors across a broad range.

Large or small, investors know what the business is going to look like. Landlords know the individual local owner has skin in the game and will be supported and have the best chance of success.

And, if the unfortunate were to occur, often a franchisor will step in to operate the business, continue employment and pay the rent.

Banks may look more favourably on a franchise versus a stand-alone business.

It provides for more accurate business planning, and the banks are able to compare, benchmark and measure against other units.

Last but not least, franchising is a significant force of social good.

Contributing directly by generating employment, leading to growing strong economies, creating and supporting vibrant communities.

The statistics are evident.

Often under-acknowledged is the social contribution franchising makes via giving back to their communities to causes including children's welfare, medical research, and social services.

That can extend to local and school sporting sponsorship, in many cases supporting activities that otherwise would not be possible.

The indirect and unmeasured contributions are huge. Just look at the pride of a young player of the day enjoying their prize.

So, the next time you buy a burger, have your grass cut by someone with that branded van, deal with someone you know that owns, is employed or supplies a franchise business – or even attend a local rugby game – you should be able to feel that you are contributing to the force of good created by franchising.

*All statistics in this article are quoted from The Franchising New Zealand 2017 Survey.

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Copyright

© Copyright Nathan Bonney

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Game Changer Ahead


We can find the franchise that is right for you - 

Our experience is extensive and our approach is unique, we match people, brands and businesses.

Iridium Partners help potential franchisees research, evaluate, and navigate the franchise industry. We'll be by your side with advice and guidance as we pair you with a franchised business, examine the systems and processes, and help you take your first steps towards success.

We work with a number of high-profile and well-known brands to offer franchise opportunities, and can also assist with purchases outside of our network. 

Call us to discuss the opportunities we have for you right now 


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Do you know who’s working for you?

Are you confident that you know that each and everyone of your employees is legally entitled to work in New Zealand at this precise moment.

Again in the news today there is yet another employer who has been found to be illegally employing a person to work in their business.Whether this employer was aware and ignored the fact or perhaps they simply had no idea this person was not entitled to work legally in this country made little difference to the punishment handed down by the Court. It is each and every employer or business owner's responsibility.

Whilst the individual employee may not have reported directly on a day to day basis to the person convicted they non the less were fined under the Immigration Act for their company's misdemeanor. The court upheld that the company was responsible for ensuring all employees were legally entitled to work.

Finding information relevant to an employee's entitlement to work in New Zealand is a relatively easy process in this country so one would then assume that this was something that employers and business owners did as part of their regular checks and audit processes. The increasing frequency of reading about yet another employer being fined for illegally employing someone however tells a different story. So why do so many employers fail to do these simple checks? Is it perhaps because they do not see it as important, perhaps they do not have an understanding of New Zealand employment legislation or perhaps they just simply don't have the tools, a method to keep track and top of this information or perhaps even the resources to do so.

Employers and business owners cannot continue to ignore their responsibility for this – the courts will certainly continue to crack down on those who don't comply with the legislation and the fines and punishments are only going to increase. Don't be the next business owner / employer to make headlines for all the wrong reasons – Iridium Partners can certainly help you down the right path of compliance.

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THE 3 CRITICAL THINGS WE LOOK FOR IN A FRANCHISE SYSTEM

THE 3 CRITICAL THINGS WE LOOK FOR IN A FRANCHISE SYSTEM

With 6311 franchise systems operating in New Zealand a potential franchisee could be forgiven for asking how on earth would they identify and choose the industry sector, brand and location in which they are going to be successful?  What are the key factors that come into play and how do these differ between individuals?

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

Before we start to look at how individual potential franchisees find the right brand and location match, let's look at how Iridium Partners decide what franchise systems we will work with and why? In our minds, everything happens in threes, there are three primary colours, the rule of three - good things, and bad, come in threes, the triangle is the strongest geometric shape, the most stable stools have three legs…and we look for brands that have all three of the following characteristics;

Good single unit economics
A well-defined and resourced franchise support structure
Evidence or likelihood of long term sustainability


We would suggest that these should be at the forefront of any potential franchisee's mind, and pre-requisites ticked off before pursuing any opportunity. Let's look at these areas in a little more depth and identify some of the indicators or telltale signs that may or may not be evident.

1. The franchise system must have good single unit economics
Success has many measures, in business a good starting point is that the investment provides a reasonable profit and return to the capital and human resources engaged in the business. That is basically, one, the franchisee will at some stage, obtain an income from the business which either in absolute terms or in their mind, replaces the income they could have been earning as an employee, two, that the rate of return or income provides a return to the capital invested, and three, that the business is able to exist and generate these returns over time, including the actualisation of the business being on-sold and returning capital to the investor.

A single unit business or franchise which is able to achieve these three targets is often referred to as having good single unit economics.In the most basic sense, the business works on a single business unit level.It sounds and is fairly fundamental but not always evident when looking at franchise systems or brands! Do not be fooled that a franchise system with loads of outlets and franchisees and looks very much like a successful system has good single unit economics.  Remember that most franchisors make their income from the sales from within the system via franchise fees, or from granting new franchises, and franchisees make their living from the profit at a franchise unit level.  They are different dynamics and not always linked or both present in a franchise system.

So, what do we look for?  We discount the top and the bottom performers and look at how many units operate in the middle of the pack, do the middle or average operations in the system have good single unit economics.  How focused is the franchisor on ensuring that franchisees are profitable? What benchmarking information is available and reviewed by the franchisor? The questions for the potential franchisee should be about mitigating risk; on average does the system have good single unit economics, on average, if I follow the system, will I make money?  A potential buyer should be looking at the set-up costs for a new franchise versus those on the market or recently sold, and how long existing franchisees have been in the system.  Does the franchise system have any or many multi-unit franchisees, and are the multi-unit operations due to good single unit economics or poor?

2. Does the franchise system have a solid support structure?

The second criteria Iridium Partners examines is the support structure provided by the franchisor.  Starting with, what does the head office structure look like? Again, there are three particular areas that we focus on and believe need to be effective to consider a brand or system, initial training, ongoing support and marketing.

Initial Training - what is provided in initial training and on-boarding?  How long is the initial training period, who conducts the training?2 What does the franchisor believe successful training looks like?  Is it actually effective?  If the franchise operates bricks and mortar businesses a good indicator from an outsider's perspective is to visit different franchise outlets, is the experience consistent, this also speaks to our second point in the support structure – ongoing support.

2.Back in 2011 Nathan was interviewed by Simon Lord for Franchise Magazine when at Columbus Coffee on their training program and how to identify a franchise system with a good training program. http://franchise.co.nz/article/2146-how-do-i-learn-the-business- The pointers are still very relevant!

We want to understand, once a franchisee has completed initial training and is underway in their franchise business, what support is offered and provided by the franchisor?  How structured is this support and how effective is it?  What will the franchisor do if things do not work out well?  It is not enough that the franchisor has a great brand or even operates fantastic and successful outlets or franchises themselves, how do they support their franchisees?  What does the structure of the franchisors support office look like and who's on their team? As a potential franchisee, ask these questions, meet with the different support team members before you sign, ask to meet and get to know who you will be dealing with on a regular basis.

The third area of franchisor support structures that we scrutinise is marketing.  We look at what marketing activity on a brand level, how this is managed and how the franchisees marketing contributions are being spent and how effective it is.  Consideration should also be given to what support and material is provided for franchisees to undertake local marketing and how this integrates with national programs.  For a potential franchisee we suggest that they ask their friends, what do you know of x brand, does the perception of the brand created by marketing match the brand delivery and or what the franchisor is hoping to project?

3. Is the franchise system sustainable?

We look for a sense of where the brand sits on the scale of economic sustainability.  We're looking for brands with both demonstrated longevity and that will be around in 5 years.  Brands where franchisees have the best chance of ensuring profitability over that time, and the ability to exit the business.

Questions include; how long has the brand be around, how long has the franchisor operated the brand, will the brand (or even category) be around in five years?  Is the brand growing, if not why? It may be the leading brand in a market which is or is close to saturation, it may have peaked? Does the brand have a point of difference to it's competitors or a unique product?  Over time, how does the brand stack up against our first two measures, single unit economics and a solid support structure?  As much as its looking forward, we look at the previous performance of the brand and franchisor and how they have adapted and maintained, grown or waned in their market position.

Start a conversation with Iridium Partners

Our discussions with potential franchisees will usually start with their own set of three questions; what can you see yourself doing? In what location, site or market position?  What can you afford to invest?

But before we suggest or recommend any franchise system to a potential franchisee, Iridium Partners has run our ruler over the brand against our own rule of 3.
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