Franchising in New Zealand: what you need to know
Franchising in New Zealand - it's an exciting and fast developing market.
The population is about 4.6 million and there are more than 630 systems so there is one system for every 7,400 people.
Why? The answer is because New Zealanders love brands and businesses which succeed. Franchising offers people a chance to leave the security of employment and purchase a business which should succeed - provided the system is followed.
There are no franchising specific laws in New Zealand. However, there are existing regulations which protect franchisees and probably the three main laws are the Fair Trading Act 1986, the Commerce Act 1986 and the Contract and Commercial Law Act 2017. Those Acts focus in particular on misrepresentations and restrictive trade practices which include anti-competitive behaviour.
The Commerce (Cartels and Other Matters) Amendment Act 2017 became law in New Zealand in August 2017. This new Act amended the Commerce Act 1986.
Because the cartels legislation impacts upon key areas contained in franchise agreements, in my opinion it is very important to explain the basis of a number of clauses which are commonly inserted in franchise agreements.
Such clauses include approved products, approved services, restraint area, restraint period and location of a franchised operation.
Franchising in New Zealand: Code of Practice and Code of Ethics
There is no mandatory disclosure régime in New Zealand but there is the Franchise Association of New Zealand (FANZ) which was formed in 1996.
The FANZ publishes the Code of Practice and the Code of Ethics and all members of it must comply with both Codes. The Code of Practice has four main aims which are as follows:
1. To encourage best practice throughout franchising.
2. To provide reassurance to those entering franchising that any member displaying the logo of the FANZ is serious and has undertaken to practise in a fair and reasonable manner.
3. To provide the basis of self-regulation for franchising.
4. To demonstrate to everyone the positive will within franchising to self-regulate.
The Code applies to all members including franchisors, franchisees or affiliates such as accountants, lawyers and consultants.
6 things the Code of Practice covers
Compliance: all members must certify that they will comply with the Code and members must renew their certificate of compliance on an annual basis.
Disclosure: a disclosure document must be provided to all prospective franchisees at least 14 days before signing a franchise agreement.
This disclosure document must be updated at least annually and provide information including an outline of the franchise, full disclosure of any payment or commission made by a franchisor to any adviser or consultant in connection with a sale, listing of all components making up the franchise purchase, references and projections of turnover and possible profitability of the business.
Certification: the Code requires franchisors to give franchisees a copy of the Code and the franchisee must then certify that he or she has had legal advice before signing the franchise agreement.
Cooling off period: all franchise agreements must contain a minimum seven day period from the date of the agreement. During this time a franchisee may change its mind and terminate the purchase.
This is very important.
However the cooling off period does not apply to renewals of term or resales by franchisees.
Dispute resolution: the Code sets out a dispute resolution procedure which can be used by both franchisor and franchisee to seek a more amicable and cost-effective solution.
The Code requires all members to try to settle disputes by mutual negotiation in the first instance and this process does not affect the legal rights of both parties to resort to litigation.
Advisers: all advisers must provide clients with written details of their relevant qualifications and experience and they must respect confidentiality of all information received.
Code of Ethics
All members must subscribe to the Code of Ethics which sets out the spirit in which the Code of Practice will be interpreted.
All franchisor members of the FANZ must have a franchise agreement which contains a dispute resolution clause and a cooling-off provision. In order to resolve disputes, mediation is the favoured method and it has a high success rate in relation to franchising disputes.
Franchising in New Zealand: latest survey
In 2017 a survey of New Zealand franchising was conducted by Massey University (Auckland) and Griffith University (Queensland, Australia) and some highlights from that survey are as follows:
- The number of business format franchise systems operating in New Zealand has increased with 631 business format franchise systems operating in New Zealand, compared with 446 in 2012.
- It is estimated that franchised businesses contribute around $27.6 billion to the New Zealand economy.
- The number of units operating with business format franchise systems has also increased with an estimated 37,000 units compared with 23,600 in 2012.
- There are an estimated 124,200 employees of New Zealand business format franchise systems, up from 80,400 in 2012, with approximately 60 per cent of employees estimated to be in permanent full time employment.
- Franchising covers a wide range of industry categories and sub-sectors. Predominant sectors included "retail trade" (23%), "other services" (20%), "accommodation and food retail" (18%) and "administration and support services" (8%).
- The median total start-up cost for a franchisee was $308,500 for retail and $87,550 for non-retail.
- The median initial franchise fee was $35,000.
- Fifty percent of franchise systems have been operating since before 2000.
- Median time before a company franchises is four and a half years. Thirty-six percent are franchised within first year.
- The overall level of disputes per franchise unit was low (1.9 percent). Only 22 per cent of franchisors experienced a substantial dispute with a franchisee within the last 12 months. The most common action was mediation (49%), followed by correspondence via a solicitor (41%). There was little incidence of litigation (10%) where substantial disputes occurred.