No franchise law: New Zealand as a Tier 2 economy

greenacreslogo1Humans have evolved a large brain to help in our survival.

It does a very good job but sometimes  it get tricked up in seemingly simple differences.

One of these is the difference between the words rent and own.

  • You rent a franchise.
  • You own a non-franchised business.

Understand? You own no thing/nothing when you rent a logo. Don’t look for equity: It does not exist in franchising.

Modern franchise law defines two terms:

  1. A franchisee is the end consumer or licensee.
  2. A franchisor is the owner and any of his “associates” (sub-contractor, selling agent, etc.)

Franchise law defines what a franchisor is very widely and a franchisee very narrowly for a very good reason: franchisors will try to wiggle out of their responsibilities by pointing to someone else in the selling chain when it hits the fan.

They are as bi-polar as U.S. bankers: laissez-faire in good times, socialists in bad.

A recent New Zealand Herald article shows this:

Auckland, Feb 2 NZPA – An Auckland man charged with fraudulently obtaining $3.5 million from people he granted Green Acres sub-franchises to, has re-appeared in court.

Keith Lapham faced three fraud charges alleging he obtained money by deception from 172 people while he was a master franchisee for Green Acres from March to December 2007.

Lapham was remanded on bail to a pre-depositions hearing in April when he appeared in Auckland District Court today.

His lawyer Peter Davey said an extra two months was needed to examine more than 30,000 documents disclosed by the Serious Fraud Office.

Lapham was an independent contractor and the Green Acres company was not the subject of any investigation.

There are only two terms: franchisees and franchisors & their associates in any jurisdiction with a half-assed franchise-specific law. Can’t really fault the Herald:

New Zealand is a Tier 2 economy in refusing to pass a specific-franchise law.

This government inaction is called enabling consumer fraud.

Questions

  1. Is it any wonder that Mark Bryers, a lawyer, structured the Blue Chip fraud as a franchise?
  2. With lots of people like Mark Bryers, being attracted to franchising, what’s the probability that it’ll happen again?
  3. Is it reasonable for Kiwis to expect more backbone from their government than having Minister Dalziel making her announcements on franchise regulation from the franchisor-only trade shows?

In contrast to almost all of the G20 countries that have a franchise law, it must seem that it’s like shooting fish in a barrel in running a franchise scheme in New Zealand.

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3 Responses to No franchise law: New Zealand as a Tier 2 economy

  1. Les, didn’t you just argue awhile ago for the abolition of franchise disclosure laws on the ground that having no laws would make franchisees more discerning?

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  2. Les Stewart says:

    Michael,

    I can see that my position is, on the surface, contradictory. I am in favour of franchise laws but not of the sort that currently exist (either disclosure or relationship).

    The problem with the current two alternatives is that remedy relies on the economics of private litigation. Either of the two offers precludes 98% of all mom and pop investors. And the price of law is getting worse not better.

    Secondly, by having either type in place, the net investment risk stays the same. I believe that investors behave in a more reckless manner because they consciously or unconsciously think the hazards are less because of a law or badge of authority. This type of behaviour adjustment is called risk compensation or the Peltzman Effect.

    For example, even with all the safety advances in automobiles, the accident per kilometre has not decreased in the last 40 years (over and beyond the previous background decrease).

    From what I’ve read so far, ABS brakes cause people to follow closer and break harder than if using conventional brakes. There is fairly clear externality, though: evidence is that pedestrians, cyclists and motorcyclists are seeing their risk profiles increase because of these enabled road warriors.

    I’ve got a Gerald Wilde book (Target Risk 2, Queen’s University) on my desk that will go into his idea of risk homeostasis.

    To summarize, I think disclosure and relationship laws have shown itself to be applicable to only a token number of cases because of the price of law. Direct regulation (FTC, ACCC) has proven to deliver the same outcome but perhaps different reasons.

    These risk feedback signals are too weak to influence potential predators but cause investors to tread where they would normally not.

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  3. Carol Cross says:

    Obviously, The FTC Rule, promulgated in the late 70’s, was an ugly compromise that has encouraged franchisors to use “churning” as a management tool to guarantee THEIR profits and survival. no matter what the cost to the franchisees.

    The pre-sale Rule for Disclosure and the actual boilerplate, uniform contract also sets up the prospective franchisees for the long-term relationship that gives the franchisor all of the power under the law. From the minute the franchisee signs the franchise agreement, the deck is stacked and wrapped in contract law, and the franchisor is confident that he is “home free.”

    Under the FTC Rule, franchisees are merely available and expendable resources for franchisors and are misled by appearances to believe that there is some government oversight of franchising that would prevent franchisors from selling unprofitable franchise opportunities under cover of government regulation.

    It is ironic that the franchise agreement, the binding contract, is the BASIS for franchisor system commercial paper sold and/or traded in the financial markets or used as collateral in the somewhat “new” financial markets of securitization, etc.. and yet the franchisee prospects are given none of the protections of disclosure as are those who invest in securities, as proscribed by the SEC.

    The SBA Patriot Express Loan Program passed in June of 2007 has rendered VETs and their families the targets of explotive and abusive franchisors and the banks and lenders as well who will securitize the guaranteed portion of these franchise loans and sell them in the financial markets.

    LET THE BUYER BEWARE. Franchising is unsafe at any brand for Mom and Pop investors.

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