Franchising is an interesting area of law because there is no particular legislation regulating franchises in New Zealand. While the documents underlying franchise relationships are contractual, many other areas of law, including taxation and intellectual property, need to be considered before signing a Franchise Agreement. This article will explore some of the key considerations that should be made in this regard by franchisors and franchisees.
Many franchisors come from overseas and will therefore need to acclimatise to New Zealand laws. Some of the distinctive features of our laws include Goods and Services Tax, the “90 day trial” period for new employees, the Resource Management Act 1993 and, where profits are sent back overseas, non-resident withholding tax. Franchisors should do their “homework” on business in New Zealand and consult their legal and professional advisors where issues seem apparent. Another important first step is the registration of trade marks in New Zealand and this should be attended to as early as possible.
Find out about FANZ
While there is no government regulatory body for franchises, the Franchise Association of New Zealand (FANZ) is involved throughout the country in assisting prospective franchisors and franchisees and setting standards for best practice among its members. Making enquiries of FANZ, including reviewing its Code of Practice and Ethics and considering whether these standards are appropriate, may be a valuable starting point.
For franchisees, the first step may often be the signing of a confidentiality agreement with the franchisor in lieu of the preparation of a Franchise Agreement. As above, you should find out if the franchisor is a member of FANZ and, if not, why not. You should also make enquiries of existing franchisees to find out whether they have a good relationship and open communication with the franchisor. Another area of concern is ensuring that the franchisor has valid legal rights in respect of the intellectual property associated with the franchise.
When reviewing a Franchise Agreement, you need to consider fundamental terms such as the term and renewal period of the franchise, the (exclusive) territory where the franchise will operate and the date of commencement. In addition, common pitfalls include hidden and ongoing fees payable to the franchisor as well as the special requirements of the franchisor (e.g. uniform regulations) which may be a material obligation. On the whole, Franchise Agreements should be a “Win-Win” arrangement where the franchisor benefits from the franchisee’s ongoing business success and not just from their profit on the sale of the franchise. Caution should be taken where the franchisor appears disinterested in the ongoing operation of the franchise and is not incentivised to build upon the relationship with the franchisee.
Lastly, both parties will need to be aware of the termination mechanisms in the Franchise Agreement and this is especially true for franchisees when the decision is made to sell the business. You should have an experienced solicitor explain the process of termination to you and you should discuss what is reasonable in relation to the particular franchise, especially in terms of a restraint of trade.
It should be clear from above that to ensure that franchise relationships work to the maximum commercial advantage, it is vital that franchisees and franchisors seek professional advice before committing themselves. To that end, make sure that the advice you receive is of a specialist nature and that your due diligence is thorough.
This post was published in the FMCG Business magazine.