Johnston Lawrence

Buying in - what you need to know when purchasing a franchise

23 March 2009. by Sharmala David , tagged with Business Law | Franchising

Franchising is a method of distribution that is fast-growing in New Zealand. Having its origins in the United States in the mid-1970s, franchising has been gaining momentum in product and service markets ever since. It is essentially an entrepreneurial practice. It is a business format consisting of an organisation with a market- tested business package centred on a product or service entering into a long-term relationship with a franchisee to market and sell that business package. Franchisees are typically self-funded small businesses operating under the franchisor’s trade name to produce and/or market goods or services according to a format specified by the franchisor, using the franchisor’s systems and methodology.

The ongoing relationship between franchisor and franchisee is vital and each one is dependant on the other’s success and profitability, ideas and innovation. It is often likened to a marriage, and the hard work of both parties contributes to its success. A disastrous relationship between the parties to the contract will not see the contract through to its term, because the parties necessarily rely on the support and innovation of each other to make it a profitable venture.

Franchisors that are members of the Franchise Association of New Zealand (FANZ) are required to comply with a code of conduct and to give prospective franchisees a disclosure document specifying vital terms of the contract. Recently, however, we’ve seen a spate of instances where these disclosures were not made. Earlier this year, there were also much publicised instances of fraud.

There is currently a discussion paper published by the Ministry of Economic Development seeking to redress this situation and canvassing views from the public on whether franchising should be regulated in New Zealand with compulsory requirements for disclosures and other provisions in relation to a franchise contract. This discussion document can be obtained from the website www.med.govt.nz/review.

As a business model, a franchise has distinct advantages, such as an established system, supervision, training, support, intellectual property protection, supply of stock/material etc. There is, however, a vast amount of control that can be exercised by the franchisor on how the business is run, in order to protect the brand name and intellectual property. This should not be underestimated and is the essential point of difference between buying a stand-alone business and buying a franchise. A good way to gauge this would be discussion with other franchisees of the same supplier chain.

The franchise contract must be negotiated and drafted with care, and pre-contractual negotiations on price, territory, support etc. should be entered into with professional assistance whenever possible.

The franchise industry in New Zealand has grown significantly in the past decade and if the impending proposals for regulation eventuate, they would provide this industry with more clarity and definition, which would give all franchisees and franchisors the certainty they deserve.

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