The Dos and Don’ts of Franchising

Looking at joining a franchise? Alan Muxlow reviews the pitfalls and benefits and gives you a checklist to work through before signing the dotted line…

One of the reasons presented in the recent Building Value Productivity Partnership newsletter  for New Zealand's high house building costs was that stand alone builders are not economical. 

This, coupled with the Kiwi “norm” of building houses that are tailored to individual customers’ needs – bespoke homes, is highly inefficient and pushes up housing costs. One workable solution suggested is to segment New Zealand’s residential market into the volume/affordable market and boutique/premium-priced bespoke market.

To meet these demands some house building franchises pitch their sales to meet the volume/affordable market and others for the boutique market. It is claimed that franchising generally has a long history of success in New Zealand and now accounts for over 10% of the country’s GDP.

Joining a franchise may be an option to increase your profile, offer support to your company's operations and raise your productivity. However this is a big step to consider, so how do you start and where do go from here?  

Serious consideration will have to be given to the arrangements of and responsibility for the design of the houses, which will vary between the franchisors, who will probably have already established the protocol they follow. We recommend you research the rules and liabilities before signing up.    

For this article we are covering franchises that improve the whole operation of a builder’s house building operation, not simply a marketing opportunity.

CHECKLIST FOR A FRANCHISE ARRANGEMENT 
 Minimum entry requirements setting a high benchmark for entry

 Electronic support packages for day to day Business Operations incorporating a:   

o builder/client contract [now required by law]

o subcontract agreements 

o estimating and pricing process

o financial management process for variations and progress paymentso planning process

 Health & Safety documentation and process 

 A quality control/risk analysis process

 Site operations check-sheets and review process

 Subcontractor control sheets Full Insurance options

 Plant and equipment hire discount packages Materials and product discounts 

 Publicity and marketing support with programmed events

 A marketed Client Guarantee process which recognises:

o unrealistic clientso genuine mistakes

o blatant poor workmanship  

 Training and upskilling linked to LBPs

 Technical and management support

 Franchisee territory rights

 Clear responsibility/liability/financial targets of the franchisee

 Clarity of legal and financial terms [approved by other advisers I would use] 

 ....and value for money 

The list is the minimum.

In fact the Franchise New Zealand website – www.franchise.co.nz – links to 250 questions developed over several years that you can ask your franchisor.   This list is based on a total construction operation with some items used to protect the overall image of a franchise group.

Some builders, because of their own expertise and systems, won't require or set such high expectations as outlined above or they just simply won't be available from the franchisor. However I believe you need to review and compare your total business operations when evaluating what a franchise offers and note what may be missing or is weak or inadequate in areas where you expect their support. 

As with any contract you must read the fine print and it's the detail that will be critical. We recommend your lawyer review the contract before you sign. Also what you expect will sometimes not be what the other party deems common practise, so check the systems and processes promised.

To do this, ask to talk to other franchise holders and their clients who should provide more practical answer and insight into how the system operates.

Your questions should probe the type of support your company will get, if any and in what form.  What will the franchisor provide for those not uncommon problems that occur such as when a:

• client keeps changing their requirements

• subcontractor goes bankrupt• client won't pay 

• dispute arises about different ground conditions

• product has been ruled unacceptable

• a dispute arises with your Building Consenting Authority 

• you have made a genuine mistake with your pricing

Finally, be fully aware of your full liabilities and escape clauses. Note how long you are committed for or what dollar costs are involved for you to withdraw.

Remember it is your livelihood that you may be looking to invest in and expand, and the end result needs to be for your financial advantage.  If the option is not to proceed, then the exercise will have made you look more closely at your business operations and planning for the future.

More importantly, it has not been all in vain or wasted if, following this review, you apply improvements to your business that will benefit your future operations.