Buying a Franchise in New Zealand
Start with the fact that shapes everything else, and that most people buying a franchise here do not know.
New Zealand has no franchising-specific legislation. No mandatory disclosure document. No statutory cooling-off period. No franchise register, and no regulator whose job this is. Australia has all of those under its Franchising Code of Conduct. We have none of them.
The three things to remember
There is no franchise statute, so no disclosure is legally required. The Franchise Association code binds members only, and membership is voluntary. Royalties are charged on turnover, not profit.
What does apply
| Law | What it covers |
|---|---|
| Fair Trading Act 1986 | Misleading or deceptive conduct, including claims about likely earnings |
| Contract and Commercial Law Act 2017 | General contract rules, misrepresentation and cancellation |
| Commerce Act 1986 | Restrictive trade practices and anti-competitive arrangements |
| General contract law | Whatever the agreement itself says, which is most of it |
The Fair Trading Act is the one with real teeth, and it bites on earnings claims. A franchisor who represents likely turnover or profit in a way that is misleading is exposed under it. That is a remedy after the fact, though, which is a poor substitute for knowing before you sign.
The Franchise Association of New Zealand has a code of practice covering disclosure and a cooling-off period. It applies only to franchisors who are members, membership is voluntary, and a great many franchisors here are not members. Check membership directly with the association rather than taking a logo on a website as proof. A non-member is not doing anything unlawful by declining to disclose, which is precisely the problem.
The fee structure, and the part that catches people
| Fee | Typically charged on | Why it matters |
|---|---|---|
| Initial franchise fee | A one-off lump sum | Usually not refundable once paid |
| Royalty | A percentage of gross turnover | Payable whether or not you make a profit |
| Marketing or advertising levy | A percentage of gross turnover | Also payable regardless of profit |
| Renewal fee | The end of each term | Often overlooked when modelling the first term |
| Required suppliers | Your input costs | You may not be free to shop around |
The second and third rows are the ones to sit with. A royalty on gross turnover is not a share of your success. It is a fixed percentage of everything that goes through the till, and it does not fall when your margin does.
What that does in a bad year
Take a franchise turning over $500,000.00 a year, with a 60 percent gross margin after cost of goods, $250,000.00 of fixed costs, and franchisor fees of 8 percent of turnover combining royalty and marketing levy.
Now let turnover fall 20 percent. Rent, wages and the other fixed costs do not fall with it, and neither does the percentage the franchisor takes.
The franchisor is paid on turnover because turnover is what it can observe and verify. That is a defensible design and it is standard everywhere. What it means for you is that the franchisor's income is far more stable than yours, and that a downturn is asymmetric: your revenue falls, your costs do not, and the percentage keeps being taken. Model a bad year before you sign, not a good one.
The questions the agreement answers, and you must read
That final point deserves its own sentence. In many franchise structures, when the term ends you may have no business left to sell. The customers, the brand and often the site rights belong to the franchisor. You may have bought a job with a defined end date rather than an asset you can realise, and whether that is acceptable depends entirely on the price you paid.
Diligence, since nobody will do it for you
On earnings projections
A projection is not a promise, and most agreements say so explicitly in a clause disclaiming reliance on anything said during negotiation. That clause is there to make the projection unactionable, which tells you how much weight to put on it.
The Fair Trading Act still applies over the top of any such clause, and misleading conduct cannot be contracted out of in trade in the way a disclaimer implies. But litigating that after you have lost money is a different proposition from not relying on it in the first place. Treat every projection as marketing until you have verified it against real accounts for real sites.
A lawyer who does franchising specifically, rather than general commercial work, is worth the fee and will know the agreements in circulation. An accountant should model the downside case independently of the franchisor's spreadsheet. Business Mentors New Zealand offers mentoring at low cost. The Franchise Association can confirm whether a franchisor is actually a member. None of that is expensive against a six-figure commitment.
What this guide does not cover
Individual franchise systems, their agreements and their economics vary enormously and nothing here describes any particular one. Master franchise and area development arrangements, disputes, and the tax treatment of franchise fees all require specific advice. The absence of franchise-specific legislation means the agreement itself governs almost everything, so the agreement is what must be read. This is general information rather than legal advice, and a lawyer experienced in franchising should review the documents before you sign or pay anything.
Related guides and tools
- Business structure basics guide, for the entity the franchise will be run through.
- Commercial leases guide, for the lease that usually comes bundled with the franchise.
- Merchant fees explained guide, for another cost taken as a percentage of turnover.
- GST registration guide, for the tax obligations that arrive with the turnover.
- Business depreciation guide, for the fit-out and equipment you will be required to buy.
Test Your Knowledge
Ten questions on franchise regulation, fees and due diligence.
Sources: the Fair Trading Act 1986, the Contract and Commercial Law Act 2017 and the Commerce Act 1986, which are the general laws that apply in the absence of franchise-specific legislation; and the Franchise Association of New Zealand code of practice, which binds its members only. New Zealand has no franchising statute, and this is general information rather than legal advice. Have a lawyer experienced in franchising review the agreement and the disclosure material before you sign anything or pay any deposit.
Related tools and guides
- Business acquisition calculator: the price the cash flow actually supports.
- SDE calculator: what the vendor’s reported profit really is.
- Business health check: a scored read of the accounts before you sign.