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Sarah Pilcher on buying and selling franchises

Friday November 10, 2017

Sarah Pilcher has over 20 years legal and non-legal experience working with businesses and entrepreneurial business owners. She deals with all aspects of owning and operating businesses for her clients, with a particular focus on franchise work. She has worked outside the law as a HR Manager and a franchise consultant. Sarah and her husband owned Graffiti Guard and Asset Protect for over 15 years, commercial property services businesses. Buying, owning and selling their own businesses has given Sarah a genuine understanding of the issues owners and managers have to deal with, and as a lawyer, is mindful of . She has acted for many well known franchise systems over the years, has presented to NZLS and Chartered Accountants, has been a Business Mentor NZ, is a member of ADLS committees, and a member of the Franchise Association of NZ.

Sarah -pilcher

We had the pleasure of sitting down with Sarah recently to discuss key challenges and opportunities facing the industry today.

You can find the full Q&A below.

What does a potential franchisee need to do prior to entering into a franchising agreement?

In New Zealand there are no legal pre-requisites to becoming a franchisee. (Unless the industry itself is regulated, such as a plumbing or electrical business where the owner needs to be a registered or qualified tradesperson). The two key things to consider are that the franchisor must approve and accept the candidate as a suitable person to become franchisee in the system; and the potential franchisee should take professional advice (legal and accounting) to ensure they know exactly what they are signing up for. The Franchise Association of New Zealand (FANZ) offers a free online franchisee pre-entry training course http://www.franchiseassociation.org.nz/franchisee-pre-entry-education-programme.html which would be helpful for people considering franchising without knowledge or past experience in the sector. Franchise Agreements are long and complex legal contracts. Most people would not understand all the obligations, restrictions, costs and potential liability a franchisee has under a franchise agreement without taking specialist advice.

Do the vast majority of franchising disputes arise from a poorly drafted franchise agreement?

In my experience it is not the content of the Franchise Agreement that causes franchise disputes or complaints.  The most common problem is the lack of understanding by the franchisee of exactly what they signed up for. If a franchisee does not understand the full implications and worst case scenarios under their Franchise Agreement, it is likely that they will get a surprise when the franchisor makes decisions or takes action that the franchisee did not expect or finds unfair.  Franchisees need to be aware that franchisors usually have many rights and powers under the Franchise Agreement, and the franchisee does not have a lot of discretion about how to run their business. It is my view that if a franchisee receives good legal advice before signing a Franchise Agreement they should never be surprised by a franchisor decision, even if the decision seems unfair. They will have gone ahead with their eyes open, and be better able to respond to or accept changes, even if they don't like them.

Is there an industry body in New Zealand that oversees the regulation of franchises?

No. FANZ has a Code of Practice and Code of Ethics that apply to its members, but membership is voluntary. Otherwise, all franchise businesses and franchisor businesses in NZ are subject to the law of the land and the authorities that administer or enforce it.

Where can franchising complaints be referred?

FANZ has a complaints service but it only applies to franchisors that are members of the Association, and there is no ability to award judgement or damages in favour of a franchisee. If the franchisor is a member of FANZ they must provide for an alternative disputes process in their Franchise Agreement which usually means disputes have to go through mediation before going to court (other than urgent cases). Claims below $15,000 can be referred to the Disputes Tribunal (through the District Courts) and there are many lawyers in New Zealand that specialise in franchising that can offer advice. The FANZ website lists lawyers that are associate members, which means they have a certain level of experience in franchising. http://www.franchiseassociation.org.nz/lawyers.html

Who has the upper hand in a typical franchisee/ franchisor relationship?

Are there steps each party can take to bolster their negotiating position?  In 99.9 % of franchise systems the franchisor will have more rights and powers, and less liability than its franchisees. There is really not much potential franchisee can do to change the balance unless the franchisor is desperate to sign up franchisees and prepared to give away some of their rights. However with good legal advice a potential franchisee may be able to negotiate minor changes or seek clarity on Franchise Agreement provisions that seem unusually unfair or unreasonable.

You can hear more from Sarah at the Buying and Selling a Business seminar, being held on Thursday 16 November at the Stamford Plaza Auckland.

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