Test the waters first before diving in
12 Feb 2008

In the second of a two-part series, Damien Lynch looks at some of the issues for Australian franchisors considering franchising in New Zealand.

Rod Young, executive director of franchise consultant DC Strategy, says the biggest mistake many Australian franchisors make when entering the New Zealand market is to assume the people and culture are similar of that of Australia. “It is a different country,” he says. “It has grown up with its own culture. The key to successfully moving there is to treat it as an international franchising strategy.

“For example, New Zealand has more large country towns with populations exceeding 50,000 people than does Australia, so with a small, dispersed population, a good local area marketing program is essential for success.”

Young cites the example of Donut King, which was hugely popular in Australia almost from the day its branded food arrived in the country. When the company moved to New Zealand, there was an assumption that New Zealanders would love the donuts too. But Donut King found the going tough across the Tasman in the early days and had to work hard on selling the products to New Zealanders.

Young says another mistake that some franchisors tend to make is to understand that most New Zealanders rely on using EFTPOS or credit cards on a daily basis for event he smallest transactions such as coffee purchase.

Cash-only business in New Zealand can lose up to 30 per cent of their potential sales by not offering the relevant operating facilities to manage card transactions. Young says Australian franchisors must test their business model, system and procedures before entering the market, otherwise the exercise may end up in tears and disputes.

The majority of franchising litigation in New Zealand stems from misrepresentations made in franchise agreements. A leading franchise lawyer, Stewart Germann, says one case that clearly illustrates the dangers of not having clear terms in a franchise agreement is Video Ezy International (NZ) Limited v Cameron in 2004.

In this case, the franchisor took out an injunction to prevent the former franchise from starting and operating a rival business after the term of the franchise agreement had expired. The franchisor also wanted to protect confidential material.

After considering the terms of the franchise agreement at some length, the judges refused to grant the injunctions. The problem basically lay in the fact that the clause 6.3 of the franchise agreement contained several references to “the franchise business”.

But in other clauses within the agreement there were references to “franchised business”, a term that was not defined in the agreement. Germann says clause 6.3 had been drafted without care and was ambiguous.

The judge said: “This contract is a muddle, as a result of 6.3. It is a muddle of the parties’ own making. I do not think an equitable remedy should be available taking sides in the muddle.” When drawing up a franchise agreement, it is important to make sure that all the parties are correctly described. Germann says it is quite common for a franchise system to operate under a different company name. If that is the case, you should ensure that the company which operates and has the rights to the franchise is the one named in the franchise agreement. Where the franchise system has originated overseas, it is important to ascertain that the franchisor named in the agreement is the company carrying on the business in New Zealand and that it has authority to do so.

Germann warns that a failure to include confidentiality provisions in a franchise agreement can come back to haunt the franchisor after the expiry or termination of the agreement. He says that it is crucial for franchisors, whether they be New Zealand ones or those based overseas, not to overstate the financial success fo their franchised businesses in New Zealand.

Franchisors who belong to the Franchise Association of New Zealand must publish a disclosure document to give prospective franchisees before a franchise agreement can be executed.

Overseas franchisors can give their New Zealand master franchisee or unit franchisee, whichever is the case, a copy of the disclosure documents they can use in their own country. For example, an Australian franchisor might provide these people with a copy of the Australian franchise agreement or a United States franchisor could provide a uniform franchise offering circular (UFOC), which is tantamount to the disclosure document.

“However, if this course of action is followed, there should be a caveat provided to the NZ master franchisee or franchisees along the lines that the overseas disclosure document or UFOC of the franchisor is being provided by way of background information only,” Germann says. “It has not been amended for New Zealand conditions and must be read in that light.”

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