Cutting the risks of franchising firms

The Press

In business, a one-of-a-kind idea is sometimes too good not to replicate, hence the success of franchising. AMANDA MORRALL does a double take on one of the fastest-growing business models in New Zealand. When it comes to franchising, nobody does it quite like McDonald's.

The fast-food behemoth set an industry standard by taking a basic recipe and replicating it time and time again with unparalleled success. Its famed Golden Arches -- found in 110 countries -- are said to have greater recognition worldwide than the Christian cross.

Love or hate the Big Mac, it has the type of branding aspiring franchisors can only dream of.

But in the business of branding -- as with franchising -- the road is not always paved in gold.

For the 200 investors who got burnt buying into the fraudulent Green Acres franchise, the experience was more a road to hell.

Mostly immigrants, the would-be franchisees lost upwards of $20,000 a piece thinking they had bought into an innocuous home-ironing business. The case -- still before the courts -- was a wake-up call for the industry and franchisees.

Despite the slur against the sector, Miles Agmen-Smith, the chairman of the Franchise Association, believes it will all come right.

"I think it's done a good thing," says Agmen-Smith of the Green Acres scam.

"I do not believe it has put people off franchising but it has drawn to people's attention the need to make proper inquiries and get proper advice to be

sure they get what they're expecting."

Those assurances could also have some legal reinforcement. Legislation aimed at reducing the risk for franchisees is in the process of being drafted.

Agmen-Smith says the sector welcomes regulatory protections but does not want the franchising process to become too bogged down in red tape.

"There's a horror story of legislation in Australia. We would not want to see that but we're certainly not uncomfortable with appropriate tailored changes," he said.

Still, regardless of any legislation, Agmen-Smith thinks changes have already taken place.

"The word from members is that prospective franchisees are now more careful and inquiring, which the association regards as a very good thing."

If New Zealand continues to barrel toward the franchising of business, following in the footsteps of America -- where over half of retail transactions now occur through franchise outlets -- greater caution might be prudent.

According to Franchise New Zealand, franchising has become one of the fastest-growing ways of doing business in this country with an annual growth rate between 23% and 28%.

The sector, valued at $6.9 billion, employs 40,000 people in more than the 350 franchises.

Statistics on the number that succeed versus those that fail are harder to come by.

Callum Floyd, with Auckland-based Franchize Consultants (a business that helps small and medium-sized enterprises (SMEs) clone themselves) bemoans the lack of reliable statistics in the area.

Despite the lack of evidence to support the claim, he reckons franchising (from the perspective of those who

buy into it) is still less risky

than starting a conventional business.

"The established view is that it's highly likely that franchising is a safer business option for someone looking to buy a business because it provides the recognised brand, support and a proven business model," he says.

For franchisors, the greatest risk is lack of planning and not having the right kind of franchising structure in place, adds Floyd.

"The key thing to highlight is the importance of highly structured in-depth planning whether expanding locally or going offshore, the most important thing is to make sure that you're franchising for the right reasons."

Floyd -- who has a master's degree and PhD in franchising -- typically spends three to four months working with clients to determine a) whether they are good candidates for franchising and b) how to get them on that path.

He looks for several characteristics in a company that is ready to start franchising.

"One is having an established business with a proven track record," he says.

Good profitability, a demonstrated demand for the product, long-term commitment, sufficient capital resources and good managerial expertise are some of the other factors.

"It's quite a complex business, unlike a normal small business or company owned business," he says.

Effective franchisors will also have a unique concept that can be easily replicated and not all businesses lend themselves to that, he adds.

"It has to be a concept that can be broken into small pieces and taught effectively to others. There are some highly design-oriented businesses that are less likely to franchise than other types of business where the basic business can be replicated over and over again," he says.

Underlying all these factors is the sticky issue of brand protection: having one's product or services secured from potential poachers through patenting.

"Ideally you have a strong brand with protected intellectual property. If they're protected in some way that's advantageous," says Floyd.

Robert Loughnan, with SMEi Services Ltd, agrees but says patent protection in itself is not enough.

Loughnan sells insurance to businesses so that in the event of patent infringement, a company can challenge it in court.

He says businesses, particularly SMEs are at high risk of having good ideas stolen particularly by big companies with deep pockets.

"It's often cheaper to copy an idea, bite any court costs if they're incurred and press on because often the owner is too small to do anything," says Loughnan.

Although relatively new to New Zealand, insurance on patent protection is becoming increasingly common in Europe, especially among smaller countries whose economies are driven by small and medium businesses.

Denmark, for instance, recently introduced a scheme whereby it was a requirement to insure patent protections, says Loughnan. He reckons New Zealand, with its strong composition of SMEs, needs to go the same route.

"The message we're trying to get across to people is unless you've got the money to enforce it (patent protection), in a commercial sense is worthless," he says.

Annie Gandar, with Auckland-based Small Business Expo, says the firm has spent the last six months working on a plan to franchise the business in Australia and Britain.

In going through the steps, she reckons the firm has considerably lowered the risks of growing the business. "We don't see any risk," she says.

Small Business Expo, which runs three-day tradeshows held yearly in Christchurch, Wellington and Auckland, thinks it is on to a good thing. Since it started in 2005, its target audience has grown to more than 13,000.

"We want to become a global player in the SME market sector," Gandar says of the company's plans to franchise its model.

For firms such as Small Business Expo that want to franchise overseas, good planning and research is all the more critical, says Floyd.