There’s a new phrase that has entered the vernacular of international franchising. It started in the United States, but it’s now used in franchising discussions in the United Kingdom, Australia and soon, no doubt, New Zealand. That phrase is: “Responsible Franchising”.
The phrase originated from a report and recommendations made by the International Franchise Association (IFA). IFA is the largest membership organisation for franchisors, franchisees and franchise suppliers in the world. Based in the United States where franchising, and in particular franchise sales, are governed by the Franchise Rule, a federal regulation overseen and enforced by the Federal Trade Commission (FTC).
A review of the Franchise Code prompted the IFA to produce the report identifying five core practices of Responsible Franchising.
IFA’s core practices of responsible franchising include*
- Setting clear goals and expectations during the pre-sale period so that franchisors and franchisees are aligned in terms of their long-term relationship.
- Connecting prospective franchisees with the right opportunity through due diligence and validation of all parties in the franchise sales process.
- Ensuring that franchisors and franchisees commit to their respective operational obligations to protect both the brand and the franchisee’s equity in their business.
- Focusing collectively on driving unit economics and profitability for all parties.
- Embracing collaboration among the franchisor and franchisees through open communications with franchise advisory councils and independent franchisee associations when modifying standards to respond to changing market forces and consumer preferences.
In summary, the IFA believes that one of the most crucial ways to improve franchising outcomes is by enhancing the franchise sales process before a franchise agreement is signed.
I read into this that there is a perceived issue that franchisees are purchasing franchises whilst being either ill-equipped, ill-informed or misaligned with the brand that they are buying into. Research has indicated this is in spite of the Franchise Code, whose stipulations include franchisors being required to provide Franchise Disclosure Documents (FDDs) with very detailed information on a number of areas – referred to as Articles. The research further identified that FDDs are not being read, are too long, or too complicated by either legal jargon or financial models.
The assertion is potential franchisees are not doing their homework or due diligence, or perhaps are unaware of the available tools to conduct due diligence on a franchise opportunity.
So, what’s the relevance for New Zealand and franchising?
In New Zealand, we don’t have any franchise specific legislation. I share the view it’s difficult to see that it does anything other than add cost and complexity. Whilst I’m not a lawyer, I am yet to hear a commercial implication of franchising raised which is not covered by existing New Zealand legislation.
This means we have a simpler, and perhaps more user-friendly legal framework around franchising. In my view this produces documentation and information that is easier to understand and again, more user friendly. From reading the Responsible Franchising report, this appears to be one of the over-arching objectives.
In addition to the legal framework, other factors contribute to why I think we already have a culture of Responsible Franchising in New Zealand. We have a competitive but small market for franchisees, combined with a very high ratio of franchisors and franchisees to population. Good operators and brands flourish, the less so fade and or suffer public scrutiny in again, a small media market.
Another factor is that New Zealand Banks are conservative; several have a focus on franchising. They tend to know the brands well, do thorough due diligence on the part of their customers and generally understand SME business as it’s so prevalent in our economy.
Critically, versus being compelled to comply with a Franchise Code, in New Zealand franchisors can voluntarily join the Franchise Association of New Zealand. To do so they must comply with the Code of Practice and Code of Ethics. These include providing a Franchise
Disclosure Document, and franchisee safety provisions such as a 14-day cooling off period after a franchise agreement is signed. FANZ is also a great provider and incubator of education for both franchisees and franchisors. The Codes and their provisions lift the standard for both FANZ members and non-members.
The proof is in the data. Consecutive franchise surveys report very low levels of complaints and disputes between franchisees and franchisors.
I think that indicates a culture of Responsible Franchising is already alive and well in New Zealand.
* IFA Responsible Franchising Report
