New franchise scheme called ‘meaningless and dangerous’

The 'FranchiseWOF' scheme was initially promoted to franchisors via an email sent out on 22 April that said: ‘Stop – Now there is no need to be a member of the NZ Franchise Association.’ Following on from the first email, a second email sent out on 25 April claimed, ‘FranchiseWOF replaces Franchise Association within one week re. Franchise Sales Credibility’ and said ‘We had 275 franchisor (sic) wanting to change to FranchiseWOF last Friday.’

One of the franchisors in question says that they were listed as members of FranchiseWOF without their knowledge. The Franchise Association has sent a 'cease and desist' letter to FranchiseWOF which alleges that the emails are misleading and deceptive and breach section 9 of the Fair Trading Act.

The scheme is being promoted by Mega Franchise Consultants, a division of Mega Services NZ Ltd. The email claims of the FranchiseWOF certification, ‘This holds more value to franchise buyers.’ On its website, FranchiseWOF states: ‘FranchiseWOF does not make any guarantees to buyers. It has been designed to give buyers confidence by making sure that the franchisors listed as a FranchiseWOF member have supplied an annual statement that their “franchisor company” is trading within the New Zealand law and solvent.’

A ‘worthless guarantee’

Auckland-based Stewart Germann, who has been a specialist franchise lawyer for over 35 years, says:

‘The website www.franchisewof.co.nz contains a number of statements which are dangerous and misleading in my opinion.  For example, it says that "Franchise WOF franchisor members have to sign a guarantee every 12 months that they are trading within the New Zealand business laws and solvent – this holds more weight with buyers".  That is misleading as all businesses in New Zealand must comply with relevant laws at all times and the value of such a guarantee is worthless.’

‘Further, on the home page of the website there is a statement that "all of our members have been thoroughly screened and have signed a written statement that their company is solvent and trading within all business, IRD and general trading Laws of New Zealand".  There is no indication of what the “thorough screening” might involve and no reason, in my opinion, that a FranchiseWOF guarantee should give any buyer confidence and for anyone to rely upon that would be foolhardy.’

Protecting franchise buyers

By contrast, Mr Germann outlines the credibility conferred by membership of the Franchise Association of New Zealand. ‘Franchise Association members are required to submit all of the required documentation for scrutiny to ensure that it complies with the Association’s Code of Practice and Code of Ethics, which are freely published on the Association’s website. This is a lengthy process conducted by an independent scrutineer which is designed to ensure that members follow best practice. Once accepted, members are bound to abide by the Codes at all times. In the event of a dispute with a franchisee, either party can call upon the Association’s dispute resolution process as set out in the Code of Practice. New franchisees also have the benefit of a seven-day “cooling-off” period after signing a franchise agreement.’

Mr Germann says that, in the absence of specific franchise legislation in New Zealand, the Franchise Association’s Codes provide some protection to franchise buyers. ‘To suggest that something else, which offers no additional protection beyond that already provided by existing law, “holds more value to franchise buyers” makes no sense to me and is misleading.’

He goes on to comment that while the Franchise Association is a not-for profit organisation made up of franchisors, franchisees, consultants,  lawyers and others with a specialist interest in franchising, FranchiseWOF appears to be a wholly commercial enterprise.

‘As a past Chairman of the FANZ, I am glad to note that the Association has taken prompt action. It is vital that anyone looking at buying a franchise business should carry out proper due diligence, and ascertain whether the franchisor is a member of the Franchise Association of New Zealand. There are no guarantees in business but a franchisor who is a member of FANZ has agreed to comply with the code of practice and code of ethics, which is a far cry from a franchisor who merely signs a FranchiseWOF guarantee,’ Mr Germann concludes.

‘I wasn’t asked to sign anything’

The 25^th April email claims that ‘We had 275 franchisor (sic) wanting to change to FranchiseWOF last Friday.’

In fact, one franchisor says they have been listed as a WOF member without having been aware of the concept at all, and other franchisors may be in the same position. Estelle Logan, of V.I.P. Home Services, says that when she was offered a free listing on a franchise for sale website, no mention was made of FranchiseWOF. It was only when she was rung up by a lawyer that she discovered that V.I.P. had been listed as a FranchiseWOF member, although she had never signed anything and certainly hadn’t supplied the written statement or guarantee that the Franchise WOF website claims all its members have provided.

‘If it hadn’t been for the phone call, I wouldn’t have been aware that we were listed as FranchiseWOF members at all,’ she says. ‘I was appalled by the “STOP” email and as soon as I found out, I insisted that our listing be removed from the website.’

‘As a past chairman of the Franchise Association myself, I know the value and the credibility that such membership confers. I found the email saying there was ‘no need to be a member of the Franchise Association’ because FranchiseWOF ‘holds more value to franchise buyers’ to be outrageous and misleading.’

Proper due diligence is critical

Brad Jacobs, chairman of the Franchise Association, says that, ‘Recent research by Griffith University’s Asia-Pacific Centre for Franchising Excellence found that the majority of new independent business owners and franchisees rely on their “gut feel” when setting up or buying their business and close to half of these business operators are not familiar with the term “due diligence”. The same survey found that only one-third of business owners consulted with an accountant, lawyer or financial adviser prior to purchasing or starting a business.’

‘Doing proper due diligence is critical, which is why the organisation has recently re-launched its “Don’t Sign Without This Sign” scheme which encourages those intending to buy a franchise or franchise their own businesses to deal with members and be protected by the Association’s Codes.’

‘The Association was founded 20 years ago to promote ethical franchising and best practice,’ Mr Jacobs says. ‘It is ridiculous to suggest that this new scheme could match our rigorous scrutineering process, which some companies take months to complete.’

‘We will not be encouraging our members to participate in this scheme. The only certification which the Franchise Association and its endorsed media (including Franchise New Zealand) will recognise is that issued by an organisation which is a member of the World Franchise Council. The “cease and desist” letter has been issued in the best interests not only of our members but also unsuspecting purchasers of franchises.’

Sent by mistake?

Franchise New Zealand asked Ray Lindstrom of Mega Services for his comments. He has not yet provided a full reply but in an email has stated: ‘there has been a mistake in using the software. I employed a guy and It was a fun joke email and her (sic) sent it by mistake.‘ It is not clear to which email he is referring.

Disclosure: Franchise New Zealand is a media partner of the Franchise Association of New Zealand. Under the terms of that agreement, as from 1 April 2016 it does not promote any form of certification other than that issued by a member of the WFC.