Franchising in New Zealand

Graham Billings, Executive Director, Franchise Association of New Zealand

The franchise sector of the New Zealand economy is substantially larger than most people realise. The number of units operating with business format franchise systems has increased considerably since 2003 when a major survey was conducted. The Franchising New Zealand 2010 survey conducted by Massey University, Auckland and Griffith University, Queensland  found 423 active franchise systems in New Zealand compared with an estimated 350 in 2003. The survey also estimated a total 23,600 franchisee units, which was a 92 per cent  increase over the seven years.

The most recent survey, Franchising New Zealand 2012, however, found that system growth had slowed in the previous two years and that there were now approximately 446 active  business format franchise systems. Whilst the number of franchise units had fallen slightly to 22,400, the level of employment in the franchising sector had grown by more than 25 per cent to over 100,000 people.

The franchise model is operated across all sectors of business. In New Zealand, franchising has comparatively fewer businesses in the retail sector compared with many other  countries, but is comparatively stronger in home and business-tobusiness services. Indicative of the entrepreneurial spirit of New Zealanders, approximately 88.0 per cent of  franchises operating here are home-grown and despite the economic situation, there are some franchise systems that are still experiencing growth.

Franchising in New Zealand continues to play an important role in the economy with an estimated contribution of between $19.4 billion and $21.0 billion in turnover.

The Franchise Association of New Zealand (FANZ)

If you are looking for a business opportunity or needing advice on franchising, our recommendation is that you don’t sign anything  until you have asked the question: “Are you a member of the Franchise Association of New Zealand?” Members of the Franchise Association are the franchise professionals, committed  to uphold ‘Best Practice in Franchising’ and the Association works hard to promote the benefits of dealing with members, both for those looking to purchase a franchise and also those how need to gain professional advice. The benefit of FANZ membership for franchisees was recognised in the New Zealand Prospective Franchisees Survey*. The survey found that 75.7 per cent of prospective franchisees considered membership of FANZ important or very important, when considering a franchise to buy into.

As the peak body for the franchise community in New Zealand, the Association makes representations to Government on issues of concern to franchisors and franchisees including such issues as proposed legislation; new business support programmes and business taxation. The Association often conducts email surveys of members on key issues to gain valuable feedback prior to making a  submission.

Unlike a number of other countries in the world, including Australia, franchising in New Zealand is governed by the same commercial laws as any other business. In 2008 the Ministry  of Economic Development called for submissions on the possibility of introducing franchise specific regulations following a high profile fraud case. In 2009, however, the Minister of  Commerce concluded that there was no need at that time for the introduction of franchise-specific regulations and went on to say that that there was little evidence of widespread problems in the sector. He drew attention to the Franchise Association of New Zealand’s Code of Conduct as an area where self regulation was working. Despite the substantial  difference in the regulatory environments between New Zealand and Australia, the two 2012 surveys showed remarkably similar levels of franchising disputes.

Buying your New Zealand Franchise

Buying the right franchise can have many benefits over the stand-alone business, not least of which is that you can potentially purchase into a franchise system that has a proven track record and one where you will receive all the help you need to become successful. As a prospective franchisee, an important part of your due diligence should be to establish whether  or not the franchise you are considering is a Member of FANZ. Don’t be misled by a statement such as, “we are not members but we abide by their Codes” as we have no powers to  intervene unless the franchise is actually a Member. You should also take the free online training course for prospective franchisees that you can access through  the FANZ website and then search for the right franchise to buy through the FANZ web directory, buyafranchise.co.nz.

Of course, there are franchise systems such as McDonalds who are currently not in membership but who operate ethically and provide valuable business opportunities for the  prospective franchisee. In all cases, however, you should ask the franchisor to explain to you why they are not members. For a franchisor to gain membership of the Association  requires that they submit their documentation for scrutiny to ensure that their Franchise Agreements contain all the elements required under the Association’s Codes and Rules. Some  of the key elements that are required are:

  • Full and proper disclosure of matters important for a prospective franchisee to know and understand.
  • A seven-day cooling off period before a prospective franchisee is finally committed to the purchase.
  • A requirement that the prospective franchisee produces a certificate their solicitor to the effect that they have had the agreement explained to them – or a signed statement that they have declined to take independent legal advice.
  • If things go wrong, compulsory mediation by a FANZ appointed experienced franchise mediator is a first step in dealing with the issue.

The Association’s independent Scrutineer carries out compliance checks on a biennial basis to ensure that documentation maintains the standards that are required.

Carrying out your due diligence on every aspect of your intended franchise system is vitally important. The New Zealand Prospective Franchisees* survey found that over 70 per cent of prospective franchisees met with three or more franchisors before making up their minds and nearly 75 per cent talked to three or more franchisees of their intended franchise system as part of their decision making process. If your franchise system is in membership, you have the ability to make a formal complaint to the Complaints Panel if you believe that your  franchisor is in breach of the Association’s Codes or Rules. The Complaints Panel is fully independent of the Board of FANZ and its members are experienced in franchising both from a legal and practical standpoint. If your complaint is upheld, the franchisor can be required to rectify the situation or face a range of penalties that are contained within the  Association’s Code of Practice.

If the franchise you are going to purchase is from a Member of FANZ, you too will be required to sign up to the Association’s Code of Conduct and Code of Ethics to ensure that as a franchisee you undertake to maintain ‘Best Practice’. In addition to standards and compliance, franchisors, franchisees and service provider members gain much from membership to  the Association. Apart from the significant marketing advantage of being able to use the Association’s logo as a sign of credibility, membership also opens up a whole range of  opportunities to advance their knowledge and learn from the experience of others.

This is a unique advantage not available to non-member franchise systems and was clearly demonstrated at Annual Conferences 78 where first time attendees regularly comment that they are amazed by the amount of advice and information that was freely exchanged by  members. As a Member or the franchisee of a Member you have the opportunity to enter the prestigious annual awards, which culminate in a gala awards dinner in November each  year. These awards are based on an internationally recognised business excellence system and not only provide you with the opportunity to showcase your business, but also gain  valuable insight into the opportunities to improve your business from the feedback reports provided by the evaluators. There are entry categories for both franchise systems and  franchisees and winners regularly use their success in marketing campaigns.

Exporting Your Franchise to New Zealand

For an Australian franchisor coming into New Zealand it is a relatively straight forward process from a legal point of view. Most systems that come into New Zealand from Australia set  up a local company both to protect intellectual property in New Zealand as well as to ensure a ‘foothold’ in New Zealand. It is important to get trademarks registered in New Zealand as early as possible. It is not an expensive process but should be considered well before actually arriving in New Zealand. If the Australian franchisor is operating directly in New  Zealand then the franchise agreement should be reviewed by a New Zealand lawyer and made subject to New Zealand law and to New Zealand jurisdiction for ease of franchise rights  enforcement. Reputable Australian systems that come here ensure that they have a disclosure document that is relevant to New Zealand circumstances as well as a cooling off period  etc. A number of Australian systems have made, as a key feature of setting up in New Zealand, an early application to join the FANZ especially as the FANZ requirements for disclosure  differ in some ways from those required under the Australian regulations.

Proper disclosure documents, cooling off period and mandatory mediation as a dispute resolution process  are all part of the voluntary Code of Practice to which all FANZ members are required to adhere. It certainly enhances the reputation of the system operating in New Zealand. Obviously,  if a Master Franchisee is appointed in New Zealand then having that franchisee become a member of the FANZ is likely to be perceived as a system which respects the  maintenance of high standards. In spite of a minority of lawyers and accountants  seeing franchising as something akin to the Wild West, the vast majority of lawyers, accountants and business brokers throughout New Zealand have a reasonable understanding of  franchising and the benefits it can bring to franchisees. There is a growing number of lawyers, accountants and business brokers who specialise in franchising.

There is still a good  deal of education to be undertaken for the public about avoiding doubtful franchise systems, but the trend is for specialised business brokers to promote healthy systems and to steer  people away from the moonlight operators. The majority of the banks in New Zealand now have a strong presence in the franchise industry and bear in mind that all the major banks in New Zealand are Australian owned. There are reputable franchise consultants in New Zealand with well-established track work records and for anyone who attends the annual FANZ conference it is manifest to observe that there is a strong and proactive congeniality within the franchise industry in New Zealand. There are a small number of dedicated and respected franchise consultants in New Zealand who can be invaluable in modifying systems coming into this country. Involving their use can considerably diminish the likelihood of a legal claim being brought against a franchisor coming across from Australia.

Be aware that employment laws in New Zealand are similar to Australia and dismissing staff is not an easy  process. Also New Zealand has an act called the Resource Management Act  which, coupled with the Building Act, means that obtaining building consents for shop fit outs can be slow and expensive. It is vital to stress the need to do plenty of homework. Obtaining sound taxation advice is essential before coming into New Zealand. There is a withholding tax system for payment of royalties and other fees from New Zealand to Australia but there is plenty of advice available from accountants who understand the taxation laws between the two countries.

It is important to remember that GST applies to everything in New Zealand (even food items) and the tax structure here is somewhat different from Australia. For a start there is no  such thing as stamp duty. The government Kiwi Saver superannuation scheme requires contributions from employers to be made when employees opt in to the scheme. It is also important to know that we have the Personal Properties Securities Act which is a system of an online registration of all charges (e.g. what used to debentures for companies) against  both individuals and companies as security for moneys lent and where goods and services are supplied on credit.

New Zealand has recently been named as the 5th highest ranking country based on the United Nations Development Programme which has regard to the standard of living of its people, its population’s access to knowledge and its population’s chances of living a long and healthy life. There are many success stories for Australian systems entering into New Zealand. A point to remember, however, is that the disposable income of New Zealanders is not quite the same as that of Australians. Having said that, the lifestyle differences  between Australia and New Zealand are not significant and so long as the homework and planning are done carefully then there are good prospects for Australian systems to enter into New Zealand and becoming successful.

*New Zealand Prospective Franchisees – Franchize Consultants Ltd and franchisebusiness.co.nz – April 2011.

Additional legal commentary provided by Rory McDonald – McDonald Lewis Law.

Graham Billings
Executive Director Franchise Association of New Zealand
P: N Z 09 274 2901
W: www.franchiseassociation.org.nz

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