The need to name and shame.
Late last year, the Commerce Commission publicised its involvement in the conviction of two South Island men for misrepresentation and deception in selling franchises. The Commission started investigating complaints […]
| Late last year, the Commerce Commission publicised its involvement in the conviction of two South Island men for misrepresentation and deception in selling franchises. The Commission started investigating complaints from 13 people in 2005 and referred the case to the police. Although both the men, Stewart John Brown of Christchurch and Robert Llewelyn Parr of Horowhenua, pleaded guilty, it took the case four years to come to court. That’s four years of uncertainty for their victims. In December 2007 the news broke of an alleged fraud involving a Green Acres master franchisee and up to 200 mainly Chinese immigrants. The case led to a full review of franchising by the Ministry of Economic Development. That concluded in June 2009 that there was no need for regulation of the franchise sector but, as I write, the case has still not come to court and is perhaps another six months or more away. As there are apparently 90,000 documents to go through, this is perhaps excusable although it can be little consolation for those who have been affected – not only the immigrants themselves but the Green Acres franchisors and existing franchisees. Their brand was tarnished and their investment damaged by the initial reports, and although things have settled down after two years the eventual Court case will no doubt stir it all up again. I wrote about the Brown/Parr case in the latest issue of Franchise New Zealand magazine and interviewed one of the franchisees who had given evidence. He had not heard of the verdict and was understandably concerned about any possible impact on his business from publicity surrounding the case. Since 2005 he had put considerable effort into building his business up without any assistance from the franchisor and although he no longer had any connection with Brown or Parr he was still trading under the same name. Other former franchisees were in the same position. In addition to their concern that bad publicity will damage their businesses, former franchisees often have another reason for shunning the limelight – embarrassment. My interviewee admitted with hindsight that he probably didn’t do as much checking as he should have done, and this is a familiar refrain among franchisees who have run into difficulties. In the Brown/Parr case, both men had previously appeared before the Court, as a little due diligence should have uncovered. Unfortunately, their victims did not do that due diligence thoroughly enough. Despite the potential embarrassment for victims, naming and shaming those guilty of malpractice is a necessary evil to warn others of how and where they can be vulnerable in buying businesses. Sadly, as the Commerce Commission said, ‘It would appear that many people entering into franchise agreements are not seeking independent legal advice, even though they have had little or no previous experience in running a business.’ Accordingly, the more publicity that such cases receive, the more chance there is that the message about taking care will get through. That there have been only two such high-profile cases over four years reinforces the fact that actual criminal activity is rare in the franchise sector, but poor practice by franchisors is more common and, whether intentional or not, is frequently at the root of disputes. Another important step was taken last year when the Franchise Association of New Zealand announced that, following complaints, it had terminated the membership of two franchisors: a company called Nature by Design Ltd, which trades as scientific retail store Nature Discoveries, and The $2 Shop. Unfortunately, the Association did not reveal the reasons for the terminations other than to say that they were made under Rule 13 which deals with non-compliance under the Association’s Code of Practice. |
Although these were the first such terminations in the Association’s 14-year history they attracted little media attention, Because the Association is a purely voluntary body with no statutory powers, termination of membership has no legal impact upon the ability of a franchisor to operate and to sell further franchises should it choose to. Equally, there can be no requirement upon a company to disclose to potential purchasers that it has had its membership terminated (or upon existing franchisees selling their businesses). This will only be discovered if the purchaser does proper due diligence and seeks the advice of experienced professionals from the franchise sector – which many do not. |
Don’t drop the ball on poor performance
Lies, incompetence and customer service.
