Franchising: ticket to riches, or ruin?

If you're keen on being your own boss but don't have a clear business idea you would like to pursue, a franchise could be for you.

Franchisees take business formulas that have been successfully applied elsewhere and reapply them in a new location. Examples include mower businesses, fast-food restaurants and cosmetics.

While they can take some of the hard work out of a start-up and pay good dividends, experts say there are traps to watch for.

Kevin Bugeja is the managing director of Franchise Selection, a broker that sells franchises on behalf of about 20 companies.

He says the major plus of buying a franchise is you tap into systems that are already "up and running, tested and proven elsewhere".

There's also advantages of scale in that you can pick up customers who have become loyal to that brand. Raw goods and marketing inputs can also be bought cheaper in bulk.

However, while it can be simple to buy into a franchise, it can be much harder to get out as it involves selling a business and buyers might be suspicious as to why you want out.

After 17 years in the industry, Bugeja says he sees plenty of things that can go wrong. For instance, anyone can start a franchise system.

"You've got to be really careful of franchise systems that may not necessarily have longevity," Bugeja says.

"They could be a fad. They could be something that won't be around in the long term and people have put all of their life savings into something [because] they believed a salesperson telling them that they're going to make a lot of money."

Business people need to do their due diligence on any opportunity by engaging a solicitor, an accountant experienced with franchises and speaking with at least three independently sourced people who already own franchises in that system.

"Just listen to their stories and see what the case has been so far," Bugeja says.

Bugeja says about 80 per cent of franchisees are still in operation after five years of buying into the business - better than the 50 per cent of businesses overall.

One franchise success story is Paul Phelan. After 20 years of working as a manager with fast-food giant McDonald's, Phelan decided he wanted to branch out on his own.

Phelan began researching franchise opportunities and came across Sumo Salad.

"It was so regimental [and had] systems in place that said, 'Do this, follow this and you can't go wrong,' which I was used to from McDonald's and I thought, 'This is great, I can do this,'" Phelan recalls. "I was really confident that I would succeed."

Three years ago, Phelan bought a franchise in a Westfield shopping centre in the Newcastle suburb of Kotara.

As a manager at McDonald's, Phelan had been allocated share options, which he cashed in to help fund his franchise purchase. In the beginning, he was working 70-hour weeks and found making a profit challenging. But things have since turned around and the 40-year-old is now making a tidy profit. "My sales growth has been double digits on double digits for the last two years," says Phelan, who adds his wages have also tripled from his days as a fast-food restaurant manager.

Not all stories end in success though. Experienced business operator Gavin Butler bought into a franchised system and exited four years later in what he describes as a financial disaster.

"I personally experienced the spin of the franchisors and saw firsthand many experienced people fail, not due to their own lack of expertise or unsuitability to franchising ... but simply due to them buying into a flawed and failing franchise system," he says.

- © Fairfax NZ News