Buying a NZ Franchise: Is the Asking Price Fair?

An established franchise can look attractive: customers already visit, staff know the routines and the business has a trading history. But an operating business is not automatically worth its asking price. When buying an existing franchise in New Zealand, you need to establish what you are paying for and whether its value survives the change of owner.

1. Separate the purchase price into its parts

Ask the seller for a written breakdown of the asking price. A single headline figure can conceal very different components: equipment, stock, goodwill and other assets. Your accountant and an independent business valuer can help assess whether that breakdown is commercially reasonable.

Distinguish the payment to the seller from any separate payments to the franchisor. An existing outlet’s sale price does not necessarily include your initial franchise fee, training charges or other entry costs. Confirm which charges apply to you and which remain the seller’s responsibility.

For each component, ask:

• Equipment: Is the value based on realistic second-hand market value, rather than its original purchase cost?
• Stock: Will it be counted at settlement, and how will expired, damaged or slow-moving items be treated?
• Goodwill: What continuing customer demand and earning capacity does this amount represent?
• Other assets: Are there prepaid services or other items, and will you actually receive their benefit?

Avoid paying twice for the same benefit. For example, a seller’s description of valuable “brand rights” needs careful scrutiny when your permission to use that brand comes through a separate agreement with the franchisor.

2. Value the rights you will actually receive

A franchise buyer acquires the right to operate under agreed conditions, not ownership of the franchise brand. That distinction matters when valuing an outlet’s goodwill.

Establish whether you will take an assignment of the seller’s existing franchise agreement or enter into a new agreement. Obtain the proposed terms before asking a valuer to finalise their opinion. A valuation based on the seller’s arrangements may not fit the arrangement available to you.

The remaining operating period is particularly important. Do not value a time-limited franchise as though its brand rights continue indefinitely. Ask the valuer to identify any assumption that you can keep operating beyond the confirmed term, and to show how uncertainty affects their assessment.

Also distinguish goodwill attached to the location and franchise system from goodwill attached personally to the seller. A locally prominent owner may generate business through relationships that do not automatically pass to a purchaser. Ask what evidence supports the assumption that those customers will stay.

Your franchise lawyer should confirm the rights being acquired; your valuer should assess their financial value. Neither task replaces the other.

3. Commission a valuation with clear instructions

An independent valuer can help determine whether the seller is asking an inflated price. Choose someone who understands small-business transactions and the franchise community, and disclose any connection they have with the seller, broker or franchisor.

Give the valuer the proposed franchise agreement, sale documents, asset schedule and relevant financial records. Ask for a written explanation of the valuation method and its limitations, rather than just a headline number.

Useful questions include:

• How have you allowed for the cost of replacing the seller’s work with paid management or labour?
• Are franchise fees and other continuing contractual costs reflected in the assessment?
• How have equipment condition and likely replacement needs affected the value?
• If comparable sales are used, how similar are their locations, agreement terms and business models?
• Which assumptions have the greatest effect on the result?

Price and affordability are separate tests. A professionally supported price may still be unsuitable for your finances. Ask your accountant to assess whether the proposed borrowing repayments leave enough room for an appropriate income and business commitments. A lender’s willingness to lend is not a substitute for your own valuation advice.

4. Use the findings before agreeing the final price

New Zealand has no franchise-specific legislation or government franchise registration requirement. General laws apply, including the Fair Trading Act 1986, which addresses misleading or deceptive conduct, and the Contract and Commercial Law Act 2017, which provides relevant contractual remedies. These laws do not certify that an asking price is fair.

The Franchise Association of New Zealand’s Code of Practice and Ethics binds its members, but membership is voluntary. It is not government approval of a business valuation.

Keep written records of statements about the price and what it includes. Give discrepancies to your advisers before committing. If the valuation is below the asking price, negotiate using specific findings rather than simply requesting a discount. Ask your lawyer and accountant to ensure the agreed price allocation and settlement adjustments are accurately documented.

Practical takeaway: Pay for the assets and operating rights you can verify, not an assumed future. Obtain an independent valuation and test affordability before accepting the seller’s price.