Starbucks, McDonalds, Caci Clinic, Mr Bun, Coffee Club, Hire-a-hubby … and the list goes on …. and on …..

New Zealand is the most franchised country in the world per capita, with a reported 37,000 franchises operating in New Zealand at May 2017.

It is not surprising that they are popular.  A good franchise opportunity should provide business owners with the safety net of a good brand, tried and tested business model, and training and ongoing support from the Franchisor.  

However, the benefits of purchasing a franchise can be diluted if the related Franchise Agreement is too onerous on the Franchisee, or if the Franchisor is difficult to deal with or too hands-off. 

The following are our top 10 tips to consider when contemplating a franchise purchase and prior to entering into a Franchise Agreement:

1. Gathering information and seeking advice

To understand whether you are making a good investment, it is important to ask as many questions, and gather as much information, as possible from the Franchisor (the owner of the franchise) in relation to the franchise model and the performance of existing franchisees using the model.

Your professional adviser can assist you to ask the right questions and help you to understand, and mitigate, the risks and liabilities associated with entering into a franchise arrangement.

It is important to understand, however, that there may be a provision in the Franchise Agreement that limits or excludes the Franchisor’s liability for any representations or assurances made prior to entering into the Agreement.  Therefore, if there are any representations made by the Franchisor prior to entering into the Agreement that are crucial to your decision to purchase the franchise, you should attempt to have them included in the Franchise Agreement otherwise you may not be able to rely on them later.

2. Assess the Franchisor’s character

When you purchase a franchise, you are entering into a business relationship with the Franchisor and so it is important to try to gauge the Franchisor’s character prior to making your decision.

Some useful indicators include how communicative the Franchisor is and how willing they are to provide you with information and answer your questions.  It can also be useful to speak with existing Franchisees (where that is possible).  Existing Franchisees can provide you with information such as how helpful the Franchisor is, how effective the franchise materials and marketing are, and how the Franchisor deals with Franchisees when there are issues.

We note that this should be done with the Franchisor’s consent. If this consent is not provided, then it may well serve as a red flag of the Franchisor’s character.

3. Location and Territory

The franchise location is extremely important. Poor site selection can have a serious impact on the success of your business. Where the Franchisor selects the location, you should ask questions about the choice and methodology used. If the methodology appears to be based on incorrect or lazy assumptions, or if you do not see the site’s potential, then this should be a significant factor in deciding whether to proceed.

Similar questions should be asked in relation to the franchise territory that you will be granted.  Will you have exclusive rights to the territory, or could a competing franchise be established on a nearby site after you have invested in your location? Attempt to negotiate an exclusive territory wherever possible.

4. Openness and transparency

Generally, a franchise relationship requires a high degree of openness and transparency. It is common for the Franchisor to have broad monitoring and auditing rights under the Franchise Agreement. Accordingly, Franchisees should understand that they will be required to regularly report to the Franchisor and follow their instructions when required. Franchisees that struggle with having to share control or being transparent may run into problems down the track.

5. Performance targets

Most Franchise Agreements require Franchisees to regularly achieve minimum performance targets, for example minimum levels of sales and/or revenues per quarter. While there is nothing wrong with performance targets, care should be taken to ensure that they are reasonably achievable. Questions should be asked about how the Franchisor set the targets, and whether the underlying assumptions are relevant and/or applicable to the franchise in question.

6. Ongoing Fees

Most Franchise Agreements will outline a number of ongoing (usually annual) fees for things such as nationwide marketing, on-going training etc.  Make sure these fees are realistic and affordable, and once operational, monitor that you are getting actual value from the Franchisor in return for these fees.

7. Limitation of liability

It is common for Franchisors to exclude their liability for certain types of loss that are difficult to predict or manage. However, some take this too far by attempting to exclude their liability absolutely, or by requiring broad indemnities from the Franchisee. This can be unfair because it severely limits the Franchisee’s ability to hold the Franchisor to account. Accordingly, it is advisable to attempt to dilute these limitations when negotiating the Franchise Agreement.

8. Termination

Ideally, where a problem arises between the parties, the Agreement should require an agreed process to be followed to resolve it.  Ideally there should be a requirement for a discussion to occur with the Franchisor prior to the latter being able to take any formal legal steps.  Particularly ensure that a one-off (even inadvertent) breach of the Agreement does not result in the Franchisor’s ability to immediately terminate the Agreement.

9.  Exit

Consider how you would like to exit in the event that your circumstances change and you need to sell your franchise. You do not want a third party Franchisor stifling your ability to do so.  The steps for selling the franchise should be clearly outlined in the Franchise Agreement. Make sure you understand and are comfortable with the steps required for a future sale.

10. Renegotiating the Franchise Agreement

It is important to realise that Franchise Agreements can be difficult to renegotiate, particularly where there are multiple existing franchises already operating under the franchise model. However, Franchisors are able to include special terms which only apply to you (including terms that vary existing terms) so it is worth attempting to renegotiate those aspects of the Agreement that you feel are particularly crucial to your success as a franchise owner.


For many, entering into a franchise will be one of the biggest business decision of their lives. Accordingly, it is essential that, before you sign on the dotted line, you have first done your due diligence and have sought professional advice.

Claire Tyler
Commercial Lawyer