Q: I am interested in purchasing a franchise. Where do I start?

A: There are many franchises out there and a good start would be to look at one where you have some industry experience.

While franchises often promote themselves as being suitable for those with no industry experience, my view is you will make better business decisions if you understand the industry, your market and your customers.

So my top tips are:

Ensure you fully understand the business model, including levers you control to manage profit.

Undertake due diligence and don't assume that because it is a franchise it can't fail; many do. Work with someone who can competently undertake due diligence and advise you accordingly. Part of this will include understanding value. For some reason, people often pay much higher prices for franchised businesses that may not deserve them. Risk should still be assessed and evaluated accordingly. Don't be fooled into historical "rules of thumb" for valuing a franchise business that may not be relevant in the current environment.

Value your time. When reviewing the financials, ensure you value your time (opportunity cost) to determine the real profitability of the business. You are then in a better position to place a value on it.

Talk about the business with current franchisees of the system you are considering - and not just the ones you are referred to.

Find out about those running the franchise including who they are and what their business and financial records are.

Steve Stark is a partner in BDO Waikato www.bdo.co.nz

A: Evaluate whether you would be better buying a franchise or starting something from scratch yourself. Make sure there are a number of outlets operating profitably by non-founders of the franchise and talk to them about their experiences.

Seek some independent advice - start with the Franchise Association of New Zealand www.franchiseassociation.org.nz.

Mark Robotham is an SME business adviser. Website: growthmanagement.co.nz

If you want to ask a question of either of our experts, email rebecca.stevenson@fairfaxmedia.co.nz

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