Franchise file

Helping people help themselves
Franchising is too important to the economy to be damaged by legislative tinkering, says Simon Lord. So how could it be used positively?

Last month, I mentioned some of the issues that are emerging as new legislation is forced to take account of the franchised business model. One of the problems the legislators face is that, as there is no legal definition of what constitutes a franchise, there is no straightforward way for them to exclude franchises from legislation which might unintentionally damage a valuable sector of the economy – a sector responsible for perhaps ten percent of our GDP.
Since I wrote that column, a submission to the select committee considering amendments to the Employment Relations Bill has suggested a solution to the problem by recommending that members of the Franchise Association should receive automatic exemption from the controversial ‘Associated Persons’ definition. Association members have, after all, been through an independent scrutineering process, although this is aimed at ensuring that their documentation meets the requirements of the Association’s Code of Practice rather than analysing the business model itself. If adopted, the proposal – made, not surprisingly, by the Franchise Association itself – would see Association membership recognised under law for the first time and create a category of businesses accepted as franchises. As well as no doubt boosting Association membership (which currently represents around a third of all franchise brands in New Zealand), this would also move the franchise sector closer to compulsory self-regulation.
A similar self-regulatory approach was tried in Australia between 1993 and 1996 and, as franchise academic Professor Andrew Terry has noted, the experiment was not successful. In 1998 it was replaced by a mandatory Franchising Code of Conduct which defines what a franchise is so there can be no avoiding its provisions. But, as I said last month, statistically the Australian regulation seems to have made little difference compared to our unregulated market in New Zealand, and the franchise sector there has also suffered the uncertainties of constant tinkering with the rules – the dreaded ‘legislative creep’.
So let’s go back to basics for a moment and ask what franchise legislation is actually designed to do? Looking around the world, there seem to be two major aims in regulating the franchise sector:
1. To stop potential business buyers being deceived by the unscrupulous.
2. To address the inevitable imbalances of power within the franchisor/franchisee relationship by ensuring that franchisees are protected against unreasonable actions by some franchisors.

With regard to the first aim, it’s already against the law to set out to con people out of their money on purpose. However, there is nothing either in New Zealand or Australia to stop anyone franchising an inadequately-developed concept and achieving exactly the same result through lack of rigorous testing. That’s why my column offered some legislative ideas from other countries that might have more impact on the long-term viability of franchises, including requirements for proper feasibility studies and pilot operations to prove any new (or imported) concept for at least 12 months before any franchisee could be appointed. Even these didn’t go far enough for one reader, who pointed out that just because a business model has been proven to be viable, it doesn’t mean the business model is franchiseable. He’s right, but – as with any legislation – where do you stop?
With the second aim – that of addressing abuses of power – it is difficult to see how this could be properly addressed by anything less than mandatory regulation for all. In actual fact, though, there is little evidence of power abuse being a problem in New Zealand and, on the few cases it has arisen, the Courts have shown considerable common sense in dealing with any such issues under existing laws.
So, putting my devil’s advocate hat on again, here’s another approach. A franchise agreement is a contract between two parties who have chosen to do business with each other. No-one has forced the franchisee to become a franchisee, but they might not have a clear understanding of what a franchise relationship involves. So instead of encouraging them to educate themselves and penalising the franchisor if they don’t, why not require franchisees to take qualified legal and financial advice to a minimum level before signing a franchise agreement? Have no exceptions, no opt-out, just a requirement that they learn about what they’re getting into and understand the need to take care and responsibility for their own actions. The result might be better for everyone.
Of course, these approaches – one requiring franchisors to prove their concepts before franchising, and the other requiring franchisees to understand their commitments – might be a bit radical. They would require lawyers and accountants to have a better understanding of franchising – perhaps even to have to take additional qualifications before offering specialist advice. And they would require consultants to prove that they had the necessary experience before being allowed to advise on the structuring of franchise systems. But if you want to build on the strong economic base that franchising has developed in New Zealand, building a fence at the top of the cliff might be more effective than having expensive ambulances waiting at the bottom.

Simon Lord is publisher of Franchise New Zealand magazine and website.