Why was a proposal to introduce franchise legislation in New Zealand shelved back in 2009? Was it because of concerns from some in the industry about a possible handbrake on franchising’s growth? Now a new study of franchise regulation around the world suggests that not only does “intelligent” regulation prevent “market inefficiencies”, but it may actually stimulate growth.

 

 

Disclosure and mediation were already built into the Association’s Code of Conduct. If anything, the recommendations didn’t go far enough to address the issues which the parliamentary select committee had been reviewing. Registration for franchisors, franchisees and franchise consultants didn’t sound too difficult. The only possibly thorny area in our opinion was what the “terms for disqualification of registration” might be.

Nevertheless there was a backlash, even from the association’s own members, many of whom felt they hadn’t been adequately consulted before the recommendations were made.

“[The recommendations] are far reaching and … [apart from the disclosure requirement] go into new uncharted territory,” said lawyer and past FANZ chairman Stewart Germann, commenting in Franchise New Zealand.

 

 

With plenty on its plate, the new government was happy to leave the whole franchising industry to regulate itself under the auspices of the Franchise Association.

 

 

Here’s something else that Blue MauMau didn’t consider. The nice consistent slope of the trend line would naturally be disrupted if New Zealand, which has one of the highest densities of franchises in the world, were to be added. On the other hand, the growth of franchising in New Zealand did stall recently, while the Australian industry has grown vigorously despite its regulated environment.

Spencer argues in another interview in Blue MauMau that regulation is needed not only to address franchise abuse, but to help prevent what she calls “costly market inefficiencies”.

 

 

“If you take the laissez faire approach and argue that people are grown-up business people entering into contracts who know what they're doing, the pain is that you have less efficient markets,” she said in the Blue MauMau interview . “You have franchisees going bust because of warped processes and information that obfuscate how their money is being used. You have franchisees committing suicide. You have franchisors becoming insolvent, while leaving a path of unchecked financial destruction in their wake. I'd say that if we don't improve regulation, we will see more failed businesses, less efficient business interactions that create unnecessary costs due to the lack of understanding of the parties and … an inefficient shifting of risk that is inherent in franchising.”

According to the blurb for her book, Spencer believes that “properly calibrated regulation can minimize inefficient allocations of power and risk and lead to maximum economic and social benefits by promoting the development

of small business, enabling the growth of entrepreneurial skills, and facilitating economic well-being and independence among SMEs.”

 

 

In his review of Spencer’s book, franchisee attorney Andrew Selden summed up the benefits a bit differently. "Any sentient franchisor should encourage regulation, if only because it tends to exclude the riff-raff from the marketplace," he declared. "The challenge is to keep the regulation effective, and short of suffocating."

 

Hear, hear.

 

One advocate of franchising regulation who has been consistent in his calls for change for many years is Gehan Gunasekara, associate professor in commercial law at Auckland University.

 

"New Zealand has been lagging behind Australia," he said in a NZ Herald article. "Strict regulation has not held back franchisors in Australia."

 

In fact, Gunasekara puts a lack of growth in Kiwi franchisors expanding overseas down to weak regulation on home soil.