Franchising in NZ: Turn Pilot Results into Credible Forecasts

A profitable existing business does not automatically prove that a franchisee can achieve the same result. Before recruiting, you need to separate the strengths of your operating model from the advantages you personally bring to it. For businesses entering New Zealand’s franchising community, a carefully documented pilot can provide the evidence needed for useful, credible financial forecasts.

1. Test an operation that someone else can run

Your original premises may benefit from years of local goodwill, favourable rent or customers who specifically want to deal with you. Those advantages can make its accounts a poor guide to a new franchisee’s prospects.

Design your pilot around the operation you actually intend to offer. This could be an additional company-owned outlet or an existing location placed under a trained manager. What matters is whether someone other than the founder can operate it using the proposed systems, training and support.

Before starting, record:

• The location, customer catchment and opening hours.
• The manager’s experience and training received.
• Staffing levels, pay costs and the founder’s involvement.
• Equipment, premises and working capital requirements.
• Any preferential purchasing terms or unusual local advantages.

Choose a testing period that captures meaningful trading conditions, including quieter periods where relevant. A successful opening promotion is not evidence of steady demand.

Keep an intervention log. If you personally rescue a supplier problem, cover a shift or secure a major customer, record the time and outcome. These interventions reveal support requirements that might otherwise disappear from the financial model.

2. Rebuild the accounts from a franchisee’s perspective

Pilot accounts show what happened within your business. A franchise forecast must explain what could happen under the proposed franchise arrangements.

Start with reconciled sales and expense records, then prepare a separate adjusted model. Never overwrite the original figures: readers should be able to distinguish actual performance from adjustments and assumptions.

Include a realistic allowance for work performed by the owner. A business can appear highly profitable when its founder works long hours without a market-based wage. Show owner remuneration separately from the return available on invested capital.

Then incorporate the costs a franchisee would face, including:

• Proposed royalties and marketing contributions.
• Software, insurance, accounting and local marketing.
• Training attendance, travel and opening expenses.
• Repairs, equipment replacement and stock losses.
• Rent, outgoings and staffing appropriate to the proposed location.

Treat initial investment and ongoing trading costs separately. Distinguish profit from cash flow, allowing for payment timing, stock purchases, borrowing repayments and GST. State whether figures include or exclude GST and apply that approach consistently.

Explain any cost advantage that may not transfer. For example, a pilot occupying premises you own should not imply that a franchisee will have similarly low occupancy costs.

3. Build scenarios, not earnings promises

Create a central forecast supported by pilot evidence, then test less favourable conditions. Consider slower customer acquisition, lower sales, higher wages or an opening delay. Explain why each assumption is reasonable rather than selecting arbitrary percentages.

A useful forecast should help a prospective franchisee answer three questions: how much cash is needed to open, how much may be needed before trading becomes cash-positive, and what sales level covers the modelled operating costs?

Label historical results, adjusted results and forecasts clearly. State the trading period, the number of operations represented and any material limitations. One pilot is evidence of one operation, not proof of typical network performance.

Prepare an evidence file containing the accounts, calculation workings, supplier quotations and assumptions behind each claim. Have an accountant review the model and a New Zealand franchise lawyer review how it will be presented.

Use the same approved figures in recruitment conversations, presentations and written material. A cautious forecast can be undermined by a salesperson casually promising that candidates will comfortably exceed it.

4. Apply New Zealand’s legal and disclosure framework

New Zealand has no franchise-specific legislation, statutory franchise disclosure regime or franchise registration requirement. That does not leave recruitment claims unregulated.

The Fair Trading Act 1986 prohibits misleading or deceptive conduct and false or misleading representations in trade. Its rules on unsubstantiated representations also make a sound evidential basis important. Describing figures as estimates does not excuse a misleading overall impression.

General contract law, including the Contract and Commercial Law Act 2017, can also be relevant to misrepresentations. The Commerce Act 1986 applies to competition issues within franchise arrangements.

The Franchise Association of New Zealand (FANZ) operates a voluntary membership framework whose code is binding on its members. For franchisor members, disclosure must be supplied at least 14 days before signing a franchise agreement, or before a candidate becomes bound by a preliminary agreement to proceed. This is a membership obligation, not a universal statutory rule. Check the current code with your adviser when preparing documents.

Practical takeaway: Before recruiting, assemble one traceable financial evidence pack: original pilot results, franchise-specific adjustments, cash-flow scenarios and approved explanations. If an important assumption cannot be supported, test it further rather than presenting it as established performance.