Franchisee offered pittance for million-dollar investment

…offered $1 each for three of the stores and $2090 for the other, plus stock at book value. Banks had invested around $1.1m in setting up the stores, and paid regular franchise levies of 5.5% of turnover a month.
February 27, 2005

Franchisee offered pittance for million-dollar investment
Tim Hunter

A Video Ezy franchisee who invested more than $1 million in four Christchurch stores was offered as little as $1 each for them by the franchise owner when his franchise agreement ran out.

Warwick Banks, who bought his first Video Ezy franchise store in 1994, is warning other franchisees to be aware of the risks.

"There are stores changing hands now for $300,000 to $400,000. Those people buying now are oblivious to the fact that at the end of the agreement the store's worth nothing," he said.

Banks' lawyer, Hans van Schreven, said New Zealand needed special legislation covering franchise agreements, as is the case in Australia. "What would protect franchisees would be clear legislative protection that would ensure franchisees' investment built up over time would be valued by franchisors."

The situation developed for Banks last year when the franchisor, Video Ezy International, declined to renew his franchise agreement, which expired last June, after a dispute. Rather than challenge the issues in dispute, Banks decided to exit the business in the belief that Video Ezy International would buy his stores back at market value. When the purchase offer came through, "that was when we knew, to put it bluntly, the shit had hit the fan", said Banks.

Video Ezy International, owned by Kevin Peterson and Russell Clark, offered $1 each for three of the stores and $2090 for the other, plus stock at book value. Banks had invested around $1.1m in setting up the stores, and paid regular franchise levies of 5.5% of turnover a month. "We were totally devastated," he said.

He brought in real estate firm Bayleys to estimate the market value of the four stores and the figure came to $1.6m.

Van Schreven said the franchisor interpreted the contract as meaning no goodwill had to be paid. "The point is that at the end of the day there was no protection. There was no basis on which any goodwill associated with the franchisee had to be paid for by the franchisor."

Earl Gray, a franchise expert at law firm Simpson Grierson, said the franchise concept meant franchisees bought the right to use a system for a set period. "The other factor is that franchise systems tend to be focused on the trademark, and the trademark is where the goodwill is focused, so that naturally tends to track back to the franchisor …

"There may or may not be any unfairness here."

Peterson said the company had taken the necessary action to protect its brand. "We have enforced the rights which are clearly set out in the franchise agreement … Franchisors the world over have got to protect their intellectual property. If you don't like a franchise agreement, don't sign it."

Video Ezy is not a member of the Franchise Association, which has a code of practice for its members, but does emulate the code in offering binding arbitration if a franchisee wants to challenge the terms of a termination.

Banks took that option, and ended up gaining several hundred thousand dollars.

The arbitration found the businesses were worth more than $1m, including $120,000 of stock, and ordered that Banks receive 49% of the goodwill - around $430,000, over $400,000 more than Video Ezy International originally offered.

After spending $150,000 on legal fees, Banks says he has gained little from the process compared to the real value of the business and is pursuing a further challenge at the High Court. Documents have been filed by both claimant and defendant and an initial conference to set the hearing date is due next month.

If the case goes all the way, it may lend weight to calls for specific legislation covering New Zealand franchise agreements. Australia has the Franchise Code of Conduct, a legal code grafted into the Trade Practices Act, which lays down rules on how franchise agreements must be drafted.

John Collins of law firm Clayton Utz in Sydnmey said the code gave more protection to the franchisee. "What it does is it rebalances the playing field, which has always been heavily tipped in favour of the franchisor."

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Risks: Call for franchise law, Refusal to renew contract, Renting a business, Opportunism (self-interest with deceit), Franchisor picks up stores for a song, You'll sign anything to get 15% of what you put into it back, Only 3 ways out: resell to next loser, independence & be sued or abandon and go bankrupt, Wealth is meant to be re-distributed (not created), New Zealand, 20050227 Franchisee offered

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