Franchise sector in NZ a "Wild West" 

Source: ONE NewsGehan Gunasekara

• WATCH the video (4:06)

A significant number of people who have bought franchise businesses over the last 20 years have apparently ended up in court claming they did not get what they thought they were buying.

This is according to an extensive new study on franchise law by Auckland University's Business School.

Senior lecturer Gehan Gunasekara says the largely unregulated franchise sector in New Zealand operates like the "Wild West".

This is despite a review of New Zealand's franchising regulations of the Ministry of Economic Development that found that the franchise system is robust.

Commerce Minister Simon Power last week said the results of the review found the combination of generic business law and voluntary self-regulation of the sector by the Franchise Association of New Zealand (FANZ) to be the most appropriate for New Zealand.

"Given the small size of our economy, there is not enough evidence to indicate that specific regulation of franchise would result in significant benefits that outweigh additional compliance costs," he said.

But Gunasekara says he is extremely disappointed the government did not call for more dialogue with affected groups as submissions toward the MED's review suggests more work needed to be done.

"There's no real regulation. The Commerce Commission - we've found in our research - has not even acted in one case on behalf of franchisees, so they've (franchisees) been left basically to fund litigation privately," he says.

The school's research found a large number of franchisees were dissatisfied compared with other people who had bought into small businesses. Franchising accounts for 10-12% of the economy whereas the litigation brought by franchisees represents 30% of all claims under the Fair Trading Act.

Gunasekara says he accepts the need for franchisees to be controlled by the franchisor in order to protect brands, but there are problems with the largely one-sided nature of franchise contracts.

"Once the contract is signed it can be changed unilaterally by the franchisor...and the franchisee can find a couple of years down the track that what they bought is completely different to how it's turned out," he says.

He also says the Fair Trading Act is not always a good path for recourse.

"For example, if I make statements of opinion that the business you're buying will be a glowing success down the track and it doesn't happen, the courts says 'well that's tough, that's just a matter of opinion," he says.

A number of local and international experts will be speaking about franchising safegaurds on June 25 at the Business School. CLICK here for more information.