More franchisees claim to have been duped

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More franchisees who claim to have been duped into buying dud businesses are backing calls for the $20 billion franchising industry to be regulated.

Some franchisees of the 42-store Guthrie Bowron home decorating chain have told NBR they want the law strengthened, following the failure of at least three of the chain’s stores in the past three years.

They blame a new format introduced five years ago, which the company says it has since scaled back.

The concept was hatched under the chain’s previous owner, private equity firm Waterman Capital.

Waterman Capital executive director Chris Marshall disputes the claim that franchisees were duped, saying his firm restricted the new concept to a company-owned store, precisely because it recognised the risk involved.

The flagship store, in the Auckland suburb of Sylvia Park, has since closed, and Guthrie Bowron has since been sold in a management buyout.

However, franchisees say the closure of at least two more new stores, in Christchurch and the Auckland suburb of Silverdale, proves that problems were not restricted to Sylvia Park.

The claim follows similar claims by franchisees of Palmers, Nosh and the Mad Butcher, that they were misled about the state of the businesses they were buying into.

As NBR has previously reported, one Nosh franchisee claims he only learned about the chain’s financial woes two days after he had sunk his life savings into his own store.

Other franchisees would only speak to NBR on condition of anonymity.

They would like New Zealand to take a leaf out of Australia’s book, and consider regulation to force franchisors to disclose more information to potential franchisees.

Trail of destruction
Auckland University franchising expert Gehan Gunasekara has been arguing for regulation for more than a decade.  So has the Motor Trade Association, which represents more than 4000 small businesses.

The government previously considered the issue in 2008 and decided not to act.

One problem is that less than half of the country’s franchisors belong to the Franchise Association, which is meant to self-regulate the industry, Mr Gunasekara says.

The official line from the association is that it doesn’t have a position on regulation.  However, it has previously been strongly opposed to the possibility.

In a head-to-head debate with Mr Gunasekara on NBR Radio, franchising lawyer Stewart Germann says he believes reports of problems in the sector are “overblown."  He also doubts that regulation would solve many franchisees’ problems.

However, he believes regulation is inevitable and would like to see it include "good faith" provisions.

Mr Gunasekara argues that many problems remain hidden due to confidentiality agreements and other issues.

Many of those who spoke to NBR agreed with Mr Gunasekara.

“Unfortunately, the sort of entrepreneurial small business bent that most Kiwis have, they need protecting from themselves,” one says.

The same person believes franchisors should support regulation, as it would help make their businesses stronger, and would help counter the strong incentives to sign up as many franchisees as possible.

“Ultimately, they’re doing themselves a disservice because it’s likely to cause themselves problems to their brand and reputation if people don’t succeed.

“From a long-term business point of view, you don’t want any bad attention to your business.  The worst attention is when businesses fold and leave a trail of destruction in their wake.”

Print subscribers and those at an organisation with an Enterprise IP Subscription can read the full story in today’s NBR print edition.

See also Top tips for potential franchisees and Skating on 'pretty thin' margins

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