With the growing demand of goods and services distribution, originators of goods and services searched for alternative types of business formats, rather than stand-alone business. Under this belief, franchise had been created and quite popular nowadays. In both United States and Australia, large proportion of retail sales are through franchising and the trend indicates that it will become the dominant force in the distribution of goods and services soon. That same pattern has been detected in New Zealand as well. Franchising is recognized as “a hybrid between an independently owned business and a vertically integrated company owned operation.” It surely combines advantages of both business patterns and “provides a win/win situation”. The fact that concerns is there are no specific law regarding franchising, not even an official or formal definition about franchise in New Zealand. The paper will start with identifications of the merits and demerits of the franchise system to both franchisees and franchisors, followed with discussion about the existing laws that regulate franchising in New Zealand.
How franchising works
To set up a business in form of franchising, the franchisor licenses the franchisee to run their business by granting the rights to produce sell or use a product, service or trademarks. Usually, the franchisor offers the franchisee with ongoing services or supports, like training, marketing, and has some kind of control over the franchisee’s business. In return, the franchisee needs to provide their own capital or initial upfront fee and, as long as the business continues, license fees or percentage of the turnover of the franchise business.
Merits and Demerits of Business Format Franchise
Franchise system gains in popularity for reasons. It combines natures of small business, usually independently owned and identical from others, and large business, which integrated ran by groups of managers. Because of that, franchising has more merits than any one of the two.
It allows franchisors to expand their business with less investment and risks. Finance issue is always the road rock for business to glow. As the franchisee provides their own capitals and pays for ongoing services, the franchisor could grow their business with less finance pressure. Addition to that, the franchisee “bears the risk of its own operation”, in which way reduce the risk of the franchisor.
Because of the reason above, the franchisor may expand to new market rapidly and develop more customers. Besides, with the development of the business, the business may benefit from growing reputation and improve the loyalty of customers.
What have to be noticed is that problems may rise as well. As customers see no difference between a franchised business operated by a franchisor or a franchisee, any damages to the reputation or good will of even a smallest franchised business would influence the brand or trademark of that business. This is the risk the franchisor needs to be careful.
To build a successful business, person need to worry about everything aspects from the beginning to operation, such as choose profitable products, find supplier, location of business, marketing strategy, pricing and so on. These may sound terrifying to inexperienced beginners. These are good reasons to buy a franchise, which you buy their experience and a mature successful business system in order to minimize the risks and increase their chance of success. As the franchisor has the same goal with the franchisee, to make profit, and rely on the expansion of the business, it is believed that the franchisor would try their best to help the franchisee to run a business successfully.
Nevertheless, nothing is ever free. Even with the guidance of a successful franchisor, the franchisee still has to finance and operating on their own and bears the associated risks. Ongoing services and freedom from the franchisor means…