Franchising: Cowboys in industry on decline due to ethics code

By Graeme Kennedy

Friday 9th August 2002

Stuart Germann

Franchisees should be wary of franchisors who over-sell their systems with false claims in an effort to induce them to buy a business, Auckland franchise lawyer Stewart Germann warns.

The first person outside North America appointed to the International Franchise Association, Mr Germann said the number of cowboys who plagued the industry several years ago had decreased thanks to the New Zealand Franchise Association's code of practice.

"However, there will always be the unscrupulous trying to take advantage of the unwary, which is why professional advice is essential to minimise the risks," he said. "Franchising is about relationships and full disclosure is necessary by both parties and it is essential for them to proceed on the basis of mutual trust and respect on both sides."

Mr Germann said he was last year involved in a video franchising case in which gross representations regarding projected turnover were made. The High Court judge found against the franchisor and awarded substantial damages to the potential franchisee.

"The message is clear," he said. "Franchisors who misrepresent fact can get clobbered by existing legislation including the Contractual Remedies Act 1979 and the Fair Trading Act 1996," he said.

Mr Germann said there was a franchise available for everyone interested in owning their own business but care had to be taken when choosing a particular system.

Potential franchisees should examine the franchisor's track record, talk with existing franchisees and obtain advice from a specialist franchise lawyer and accountant.

"I act for many people who are unhappy but did not obtain professional advice because they felt they would waste money," he said.

"Franchising is exciting but it must be done properly - potential franchisees must ask the right questions and do their homework before deciding to purchase."

Mr Germann said overseas franchisors found New Zealand an attractive place to expand as it was one of the most deregulated countries to run a small to medium business.

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