As many, or most, franchise agreements in New Zealand contain sole attention (or sole focus) clauses as well as non-compete clauses, we need to consider whether or not they are essential.
While sole attention prevents a franchisee from operating any other business, a non-compete prohibits them from running a business that could be perceived as a competitor. Both clauses are designed to ensure that franchisees dedicate their full energy and attention to the franchise with the underlying assumption that doing so will generate the best results for both the franchisee and the franchisor.
While these restrictions may have been introduced with good intentions, the franchise sector in New Zealand must now re-evaluate whether such clauses are practical and sustainable in the current economic environment. There are several key reasons why revisiting these clauses is necessary.
Multi-brand franchising – a global trend
In some countries such as the United States, Australia and the UK, it is increasingly common for franchisees to operate multiple franchise brands. This is especially true when the franchises operate in differing categories or industries, allowing business owners to diversify their income streams.
By permitting franchisees to own multiple non-competing franchises, the risks associated with economic downturns, seasonal fluctuations, and unexpected market shifts can be mitigated.
New Zealand’s relatively small and geographically dispersed population makes diversification even more crucial for long term business sustainability. Franchisees who are allowed to run multiple franchises could achieve greater financial security while still contributing to the success of each brand they operate.
Economic sustainability and regional challenges
New Zealand’s economy is characterised by its limited population and geographic isolation. Unlike in larger markets where franchisors can rely on dense urban populations to sustain their business model, our dispersed communities require a more flexible approach.
If a franchisee in a small town is restricted to operating a single franchise, their ability to maintain profitability can be severely impacted by local economic shifts. Allowing franchisees to operate multiple, strategically chosen businesses can help ensure they remain viable in challenging conditions.
Complementary and vertical integration benefits
Some franchises naturally complement each other and allowing franchisees to operate related businesses could enhance overall business success.
For example, a food franchisee might benefit from owning a complementary logistics or catering business, enabling them to improve efficiencies and reduce costs.
Similarly, a service-based franchisee might gain advantages from operating a retail business that aligns with their existing customer base.
Such synergies could create win-win situations for both franchisors and franchisees.
Flexible franchise agreements
The rigidity of sole attention and non-compete clauses can discourage potential franchisees from entering the market as they limit entrepreneurial flexibility. Many business owners prefer to diversify their revenue streams rather than committing entirely to a single brand.
If franchisors wish to attract experienced and capable business operators, they should consider more adaptable franchise agreements allowing for carefully structured multi-franchise ownership.
Legal and competitive considerations
Restrictive clauses that prevent franchisees from engaging in additional business opportunities may not always align with fair trading principles. In some cases, these restrictions could be seen as overly burdensome, reducing competition and limiting economic growth.
Reviewing these clauses to ensure they comply with modern business practices and legal standards would benefit both franchisors and franchisees.
The New Zealand franchise sector stands to benefit significantly from re-evaluating sole attention and non-compete clauses. By allowing franchisees to diversify their business interests within reasonable limits, the industry can create a more resilient, competitive and sustainable environment. A balanced approach that maintains brand integrity while embracing the realities of the New Zealand market will, ultimately, lead to a stronger and more dynamic franchise sector.
