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IMMIGRANTS NOT THE ONLY VICTIMS IN FRANCHISE FRAUD

by Simon Lord,
last updated 23/07/2009

Over the summer holidays, an extraordinary story has unfolded regarding the sale of non-existent Green Acres franchises by an Auckland master franchisee

It is alleged that Keith Lapham, a properly-appointed master franchisee for Green Acres' ironing services, has over recent months taken money for up to 200 new ‘franchises'. These franchises existed in name only and were apparently never registered with the franchisor - Green Acres Head Office. It is reported that an elaborate deception went on to ensure that the new ‘franchisees', most of whom were immigrants from the Indian and Chinese communities, believed that they had bought a real business with real work until they experienced difficulty getting paid.

The issue came to a head in December 2007. Mr Lapham was not located until 17 January and the matter is under investigation by the Serious Fraud Office, the Police and the Commerce Department. Lianne Dalziel, Minister of Commerce is taking a keen interest in the matter as is the Franchise Association . The affected ‘franchisees' have formed a group called Franchise Watch. Estimates of the amount of money involved have gone as high as NZ$5 million.

Fraud Not Franchising

If the reports are true, then a large scale fraud has taken place. However, it is important to differentiate the fraud from the franchise. While the unfortunate people Mr Lapham is alleged to have ripped off are the primary victims, there are other victims too. Green Acres as a company has been damaged by the actions of a person it appointed to a position of trust as a master franchisee, and so has the brand it has built up over almost 20 years. That will also affect the businesses of each of its legitimate franchisees as they see the company focus its attention and resources on resolving this situation. In addition, the whole franchise sector would suffer if the reputation of franchising as a way of doing business were to be tarnished by the actions of one individual.

Fortunately, the media - particularly the New Zealand Herald - seem to have taken a responsible approach to their reporting of the situation. A few years ago, a story like this would have been sensationalised as ‘another franchise scam': now, the media has recognised the value of franchising to the economy and consumers, and appreciates the value of franchising as a means of building businesses big and small. This is not a case where the franchise is the scam; instead, it's a case where someone has been able to take advantage of the good reputation of franchising and one brand in particular to defraud a group of innocents.

The measured response from Lianne Dalziel has also been welcome. It is easy for unfortunate events such as these to be followed by calls for regulation, but the truth is that even relatively tough US or Australian-style legislation would not have prevented this problem. People who are prepared to act outside one law are prepared to act outside others. Ms Dalziel recognises this. She has taken time in recent years to meet people in the franchise sector, to attend events and learn about the value franchising has to offer New Zealand business, and that may help her to resist calls for precipitate or hasty regulation. Unfortunately, Ethnic Affairs Minister Chris Carter has not been so circumspect - see comment here .

Issues Facing ‘Franchisees' and the Franchisor

All of the above does not, of course, ease the problem for those who believed they were buying a franchise from a reputable company. Often speaking little English, and operating in a strange country, they have invested considerable sums of money in their own futures. In many cases, it appears that they did so on the understanding that they would receive a guaranteed minimum income, that work would be brought to them, that they would not need a vehicle and that they did not need to converse with customers. They now find themselves in a very difficult situation with no work, no income, no business and a substantial debt.

As the franchisor, Green Acres has also been placed in an impossible situation. They have apparently not gained financially in any way from the alleged fraud and yet it is their company and brand which is being damaged. Accordingly, they have sought to assist those affected by offering a rescue package offering those who had already paid in full a genuine franchise for no franchise fee. However, there are conditions attached and this has consequently been criticised by many of those affected.

From a franchisor's point of view, those conditions are totally reasonable. A franchise's reputation is based upon the delivery of a quality product or service at an acceptable price and to consistent standards. For this reason, good franchisors are highly selective about the people whom they accept as franchisees. Appointing franchisees who cannot meet these requirements lets the system down, damages the brand and the value of other franchisees' investments and diverts resources to supporting under-performing franchisees until they can be assisted out of the system. The cost of supporting such a franchisee until exit has been estimated at over $50,000 per person.

Under these circumstances, the Green Acres rescue package includes some totally understandable qualifying criteria. These include proof of residency status in New Zealand and eligibility to own and operate a business; security and reference checks; a New Zealand driver's licence and fluency in English. Those who qualify would have to buy and wear a Green Acres uniform, use a vehicle with the company's distinctive livery and submit to ongoing security checks. These latter conditions require more investment from affected people.

Why can Green Acres not just honour the business as apparently presented by Mr Lapham? Two reasons. The first is that the Green Acres franchise system does not work by clothes being delivered to outworkers for ironing. It is a business opportunity that requires business-building effort from franchisees and cannot simply be remodelled in this way. The second reason is that there are simply not enough customers out there to accommodate 200 new ironing franchisees in Auckland, even were the company's training and administrative systems able to cope with such huge expansion. Green Acres may be the largest franchise in the country but even it cannot easily manage a 20% increase in numbers - particularly of people often ill-equipped to run their own businesses at this stage.

Preying On Immigrants

It is clear that there cannot be a ‘quick fix' solution to the current problems. Green Acres has reportedly accepted a moral responsibility to assist those affected, although the legalities of the situation are not so clear. However, they do not have the ability to wave a magic wand any more than the victims, the Minister or the media. Issues will take time to resolve and this may happen more easily outside the public eye. It has been reported that Green Acres has been ordered by the Serious Fraud Office not to talk to the press. This may or may not work, given the emotive nature of the victims' complaints.

Perhaps the most unfortunate aspect of the situation is that it has affected a community to whom franchising has so much to offer. We have seen in recent years immigrants from India and China achieve huge success as franchisees - Shiraz Hajee and Jenny Chen being just two award-winning examples - through combining their own hard work and energy with the brands and systems of well-established businesses.

However, new immigrants are vulnerable and in this instance they appear to have been specifically targeted. The number of people who buy businesses without taking proper legal and financial advice is frequently a source of despair for those in the franchise sector and in many cases there is no excuse for it. In this instance, however, it is easy to find sympathy for those in a strange land, with limited language skills and little knowledge of the commercial world, who find themselves taken advantage of through no fault of their own.

The latest issue of Franchise New Zealand magazine featured an article on the opportunities and issues for immigrants looking at franchise opportunities. That story is now available on line here and includes Ten Top Tips for Immigrants.

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