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by Simon Lord

last updated 23/01/2025

Simon Lord is the Founding Editor of Franchise New Zealand magazine, now retired.

The Code Four Years On

by Simon Lord

last updated 23/01/2025

Simon Lord is the Founding Editor of Franchise New Zealand magazine, now retired.

From the Archives: September 2001 - The Franchising Code of Practice was launched in July 1997. Simon Lord examines the impact it has had, and asks what protection it provides?

Editor's Note: The Franchise Association of New Zealand's Code of Practice and Ethics was updated in 2024. The following is an historical record of the events leading up to and following the Code's establishment.

The launch of the Franchise Association's Code of Practice four years ago was heralded at the time as a 'landmark move' by David McCulloch, then Chairman of the Association. It broke new ground for New Zealand by setting out minimum standards of conduct for franchisors.

The self-regulatory Code of Practice only applies to members of the Association. It requires franchisors to produce a detailed disclosure document covering a wide range of areas, including the franchisor's financial track record. It also provides for a seven-day 'cooling off' period and sets out a disputes procedure for resolving problems between franchisors and franchisees.

But what impact has it had, and what protection does it really provide for prospective franchisees?

The Code's Impact

'When it was introduced, I think a number of members were nervous about the effect the Code might have,' recalls Robert Fowler, vice chairman of the Franchise Association and chairman of the membership committee. 'There was no external pressure on franchising at that time to self-regulate, and a number of people wondered whether it would actually slow down the growth of the sector.

'But as the figures have shown, franchising has gone on growing. More importantly, I think that the Code has raised standards enormously for the benefit of all.

'Any franchisee comparing the offer documents from franchise systems then and now would notice a huge difference - and in fact I believe there is still a huge difference between the offerings of our members and those provided by a lot of non-members. I know from our own experience in the Bedpost franchise that the development of a full disclosure document and the addition of a disputes procedure to our franchise agreement has only improved our franchise offering.

'And the fact that we, like every other franchisor member of the Association, have had our documentation assessed by an independent scrutineer has only added to our credibility in the minds of potential buyers.'

What Is Its Purpose?

The Code of Practice has four main aims:

 

  • To encourage best practice throughout franchising.
  • To provide re-assurance to those entering franchising that any member displaying the logo of the Franchise Association has taken serious steps to learn their business and has undertaken to practise in a fair and reasonable manner.
  • To provide the basis of self-regulation for franchising. Members of the Franchise Association who fail to adhere to the Code know that they will have to justify their actions, remedy any defaults, or face expulsion.
  • To demonstrate to Parliament and public alike the positive will within franchising to regulate itself, and to make life as difficult as possible for those who do not operate in an ethical fashion.

'While existing legislation provides adequate safeguards for franchise purchasers under the law, it only comes into play when things have already gone wrong,' explains Association Chairman Win Robinson. 'That's too late - it's like putting the ambulance at the bottom of the cliff. The Code of Practice was introduced to help people get all the information up front, and prevent anyone from falling over the cliff in the first place!'

The Code of Practice applies to all members of the Franchise Association whether franchisors, franchisees or affiliates such as consultants, lawyers, accountants and other professionals.

New members of the Association must agree to be bound by the Code before they can be considered for membership, and their documentation is independently assessed to ensure that it complies with the Code's requirements. Existing members are required to update their documentation annually and re-submit it for assessment.

'Some franchisors will tell you they meet the criteria for the Code even if they aren't actually members, but frankly I find that a bit odd,' says Robert Fowler. 'If the Code is valuable as a measure of their integrity, why don't they apply for membership and submit their system to independent scrutiny?

'It's like the people who tell potential franchisees "McDonald's isn't a member either, so why should we be?" They ignore the fact that McDonald's has fifty years of system development behind them and is recognised world-wide as a successful system.'

What Does It Say?

The Code covers the following areas:

  • Compliance and non-compliance
  • Disclosure
  • Certification
  • Pre-payments and Cooling Off periods
  • Standards of conduct
  • Dispute resolution
  • Identification
  • Advisors

Compliance

This requires all members of Franchise Association to certify that they comply with the Code of Practice. Where the member is a franchisor, they must also ensure that new franchisees and master franchisees comply as well, thereby ensuring that the standards of the Code will be maintained throughout the system.

Members must renew their certification of compliance on an annual basis.

Disclosure

Franchisors must provide a disclosure document to all prospective franchisees at least 14 days prior to signing a franchise agreement. This disclosure document must be updated at least annually, and must contain the following information:

A company profile with details of the company and its officers. The purpose of this is to enable the potential franchisee to do their own checking of the particulars of the people involved in the franchisor company. It does not remove the onus on the buyer and his advisors to exercise due care, but it does provide the necessary information to check.

An outline of the franchise. This must include:

  • History of the system
  • Trade mark particulars
  • Details of all payments to be made by the franchisee to the franchisor
  • Details of any amount refundable if the agreement is terminated after a deposit is paid
  • A summary of terms and conditions for purchase of goods
  • A summary of terms and conditions relating to termination, renewal, goodwill and assignment of the franchise
  • Summary of the main obligations of the franchisor

The aim of this section can be summed up as 'No nasty surprises'. 'It is not unknown for excited purchasers to miss certain key points, nor is it unheard of for an over-enthusiastic franchisor or broker to gloss over some of the conditions,' comments Robert Fowler.

'By setting out clearly the terms and conditions upon which the franchise is to be sold and operated well in advance of signing an agreement, the franchisor is ensuring the clearest possible understanding of the nature of the deal for the potential franchisee.'

 

Commissions

The document must disclose details of any payment or commission made by the franchisor to any advisor or consultant in connection with the sale. A potential franchisee has the right to know if the advisor who recommends the franchise to him or her will benefit financially by doing so.

Financial

There must be a list of components making up the franchise purchase - for example, the franchise fee, stock, fixtures and fittings, working capital and so on, along with costs. It must also include details of any financial requirements by the franchisor (eg required equity levels), and provide a certificate of solvency signed by the Directors of the franchisor company.

This enables the purchaser to confirm that the costs of establishing the franchise are reasonable, and that both they and the company have a clear understanding of each other's financial position.

References

The document will contain a list of existing franchisees and company outlets, along with details of any franchises terminated or not renewed in the past year and information on any outstanding litigation. Prospective purchasers are always well-advised to talk to existing franchisees about any system which interests them; this makes the process easier, and also encourages them to check other details.

Projections

Where figures are included, they must be clearly qualified as to whether they are examples of actual performance achieved, or if they are projections. If the latter, the basis of any assumptions made must be included. There must also be a clear statement of what is and is not included (for example, wages or the cost of servicing loans) and confirmation that the figures do not represent a guarantee of performance.

Purchasers can reasonably expect an outline of what the business they are buying might achieve, but this is an area fraught with danger as, in business, nothing is certain. The purpose here is to qualify the figures by explaining exactly how they are arrived at and why they are relevant to the purchaser's specific business.

Are They Providing The Information?

The purpose of a disclosure document is to arm the purchaser with real, fair and honest information about his or her intended business. By setting this out clearly, the potential franchisee and their advisors will be in a better position to make an informed decision as to whether to proceed. But is this actually happening?

'Yes, it certainly is,' says Robert Fowler. 'It took most members a little time to bring their documents into line with the requirements of the Code, but the benefits have been enormous. Not only are they ensuring that new franchisees have a full understanding of the business and the nature of the contract before they come on board, but they are recognising that the level of disclosure required by the Code actually protects the franchisor from allegations of misrepresentation further down the track.

'Many franchises actually choose to go into even greater detail, and all credit to them for that,' he says. 'It is a lot more difficult for the shoddy operator to survive if he keeps getting asked "Where's your disclosure document? Why doesn't it cover this? What about that?"

Certification

In order to ensure that full disclosure is made, the Code actually requires franchisors to give franchisees a copy of the Code of Practice. The franchisee must then certify that they not only received the disclosure document and the Code the required 14 days before assigning the agreement but that they have also had the franchise agreement explained to them by a solicitor.

Robert believes that this is a vital part of ensuring that people don't cut corners. 'It would be a very unwise person indeed who entered into a long-term contract involving them in spending $20,000 or even $200,000 without taking legal advice. Unfortunately, it does happen, and it's a recipe for disaster.

'Good franchisors want people to come into their systems with a realistic grasp of what the franchise means. A lawyer experienced in franchising is probably the best person to make sure that's what they have.'

Pre-payments and cooling-off periods

The Code of Practice also insists members offer a 'cooling off' clause. This requires all franchise agreements to contain a minimum seven day period from the date of the agreement during which a franchisee may change their mind and terminate the purchase.

However, some franchise systems start training within seven days of signing, and franchisors are understandably wary of passing systems and commercial secrets on to people who may then not join their system. Accordingly, the Code offers an alternative option which is an 'agreement to agree'. This must be signed at least seven days prior to the execution of the franchise agreement itself.

The cooling-off period does not apply to term renewals or re-sales by franchisees.

Standards of conduct

This requires franchisors and franchisees to act in an ethical honest and lawful manner and to endeavour to pursue best franchise practice.

Dispute resolution

Survey show that although disputes are mercifully rare (affecting only 1% of total franchisee numbers), the nature of business is such that almost a quarter of franchise systems will have experienced a dispute at some point. The Code of Practice requires franchisors to provide a mechanism whereby these can be resolved quickly, cheaply and with minimum damage to the franchisor/franchisee relationship.

'Legal action should be a last resort,' says Robert Fowler. 'What the Code sets out is a dispute resolution procedure which can be used by both franchisor and franchisee to seek a more amiable - and cost effective - solution.'

The Code requires members to settle disputes by mutual negotiation. In the event that they are unable to do so, either party may request the Franchise Association to provide assistance. The Association will help in finding a conciliator if required, and the dispute must be referred to them within 21 days.

The conciliator will then deal with the matter within 14 days, in strictest confidence, and will make a recommendation upon the resolution of the dispute.

This process does not affect the parties' legal rights, but it does offer a non-confrontational way to resolve problems.

'It is noticeable that this form of resolution is on the rise,' comments Robert. 'Because the mechanism is there, people are using it - and that's so much better for everyone than going to the law courts.'

Identification

Franchisees are required to identify both on their premises and their business stationery that they are operating their business under franchise from the franchisor. This is to protect the system and other franchisees from possible mis-use of the franchise name.

Advisors

Advisors must provide clients with written details of their relevant qualifications and experience. They must respect confidentiality of information received, and disclose to the client any personal or financial interests which may create a conflict of interest in respect of the client.

Code of Ethics

Members must also subscribe to a Code of Ethics, which sets out the spirit in which the Code of Practice is interpreted.

 

Is The Code Too Tough?

Over the past two years, questions about the Code of Practice have been included in the annual Survey of Franchising, which covers members and non-members alike. Results show that approximately two-thirds of franchisors are at least moderately aware of the Code of Practice according to surveys over the past two years.

The Surveys have also shown a small measure of discontent with the Code, with some franchisors feeling that it is too tough and favours franchisees. Others feel that differing levels of compliance should exist for different types of system.

'The Code did seem tough to comply with initially, because existing systems had to make changes in order to comply with its provisions - we did ourselves,' says Robert. 'But if you look at new franchises coming through, they are building in things like dispute resolution procedures right from the start. Shouldn't existing franchises also learn from experience and continue to improve their systems too? When I added the dispute resolution clause to our franchise agreement, existing franchisees only saw it as a positive.

'As for favouring franchisees, perhaps it does. It certainly enables franchisees to get the full facts in a useable manner, and to compare the offerings of one system against another. As a franchisor, I feel very comfortable with that. It provides protection against misunderstandings for both the franchisee and the franchisor, and I can't see how - or why we should want to - water that down for different systems

'Is it too tough? I don't think so. We have more franchise systems in the Association than we did four years ago. We lost a few originally who were not willing to abide by certain aspects of the Code of Practice, but some of them have turned around. We also changed the rules recently to enable new franchises to become full members and use the Association logo in their marketing providing their documentation complied in full. Again, some do not currently qualify and their membership is on hold, but we look forward to considerable growth in the next couple of years.'

Does It Have Teeth?

One other suggestion from this year's Survey was that the Code should be made compulsory for all franchisors. 'That is not up to us to decide, although I personally believe that anyone involved in setting up franchises should be required to meet a certain standard,' says Robert. 'However, the only way to do that would be through some form of regulation, be it legislation or the transformation of the Association into a Franchise Institute.'

Without that compulsion, does the Code have teeth? 'The Code sets out to ensure that franchise buyers get the information they need to make a decision. If the franchisor does not meet the commitments he or she has made, in writing, in the disclosure document, the buyer can call on legislation such as the Fair Trading Act to supply plenty of teeth.'

Robert Fowler sums up. 'The Code of Practice provides potential franchisees with the reassurance that when they deal with one of our members they will be dealing with a company which has been confirmed as meeting certain standards. They know that they will get the information they need, that they will not be hustled into a decision, and that the franchisor has inbuilt systems for handling problems. Buying a franchise can never be entirely risk-free, but having the protection of the Code of Practice reduces the worry.'

Simon Lord is the Founding Editor of Franchise New Zealand magazine, now retired.

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