Collapsed Signature Homes franchises around New Zealand have left more than 450 unsecured business creditors out of pocket by more than $4.5 million during the past five years. Otago Daily Times Business Reporter Simon Hartley asks the parent of the franchised companies, Signature Homes Ltd and its managing director Gavin Hunt, about its business model for franchisees.
Ten construction companies associated with parent franchise owners Signature Homes, David Reid Homes and Landmark Homes have collapsed during the past five years, owing millions of dollars to unsecured creditors.
Signature Homes has been operating for 28 years and expects to build houses valued at more than $100 million this year, but in Otago, Signature Homes franchise collapses have occurred twice during the past five years, owing in total more than $2.3 million.
Two more franchises have gone under in Wellington.
The parent company says it has since tightened its franchise processes, invested in management technology and overseen the completion of 16 Otago and Southland homes which were contracted to Dunedin-based Murwil Construction at the time of its liquidation, under a new Home Completion Guarantee offered by Signature.
Last week, Jennian Homes Otago Ltd became the latest franchise-builder casualty, having got into financial difficulty amassing $581,731 of debt amid plummeting sales earlier in the financial year.
The issue prompted Jennian's owner to offer to put more than $100,000 of borrowed money into the company, if the 93 creditors would accept payment of 20c in the $1, which would keep the company trading.
For dozens of Signature Homes' clients and hundreds of business owners, the past five years have been fraught, with the four Signature franchisees in two areas getting into financial difficulties, owing millions of dollars to tradesmen and businesses.
Tauranga-based Gavin Hunt is managing director of Signature Homes Ltd, the parent company of the franchised businesses, does not believe the business model for franchisees is flawed.
In the wake of the franchisee problems, the parent's Support Office resources to franchise holders had been doubled.
"Several hundreds of thousands of dollars" had been spent on a business management system, and accountancy firm Deloitte audited Signature quarterly, including its franchise management, Mr Hunt said.
"The principal conclusion from this audit was that our systems and processes were essentially very sound, but we had to ensure they were strictly followed by our franchisees."
The primary problem of Signature franchisees was their failure to follow processes and systems, weak leadership at the franchise level allowing "the wrong influences to prevail" and fraudulent activity of a franchisee, as was the case of one Signature franchises holder, Mr Hunt claimed.
While Signature had not changed its franchise business model, it had "tightened" systems, which included its Support Office taking a more "dictatorial" approach to franchise management.
The contracts of up to three franchisees had subsequently been terminated, Mr Hunt said.
Trading conditions for the building sector were the worst in 20 years and consent numbers were down 40% on two years ago.
"This has resulted in all of the major branded builders in New Zealand, and world-wide, suffering franchise failure, just as there has been a huge number of independent builders failing."
As the parent franchise, Mr Hunt said it was "frustrating" that there was a lack of support, advice or intervention by the franchisees' own accountants and solicitors.
"In the cases of failure ... not once to our knowledge did the relevant accountant or solicitor either give the franchise advice that they were trading insolvently, and needed to take appropriate action, or contact us to say there was a problem."
As the parent, Signature's responsibility was to provide the brand, systems and processes, marketing advice, materials and standard plans, and did offer business advice.
However, the franchises were independent businesses and "we do not manage their franchise businesses ... we are not directors or shareholders, and cannot, and must not, act as such", Mr Hunt said.
In selecting a franchise holder, Mr Hunt said there had been "significant change" in the process.
Now there was "intense" scrutiny: several interviews with senior Signature staff, the assessment of skills and experience, in-depth reference checking with past employers, employees and associates, such as accountants and lawyers.
"Financial requirements have also been increased to ensure the new franchisee has adequate working capital in the event of a very slow start-up to his new business," Mr Hunt said.
As a private company, parent Signature Homes Ltd is not required to lodge an annual report and divulge its financial operations.
When asked if he would supply a brief "thumbnail" disclosure of financial operations for the five years from 2005 to 2010, including the number of franchises in operation, annual turnover, costs paid for successful client claims and the company's after-tax profit or losses, Mr Hunt said he was not prepared to disclose "commercially sensitive information".
However, he said the business was "profitable and sound" and "had no bad debts".
Mr Hunt did say claim costs from clients in some years, from both "guarantee obligations" and "moral obligations" ...
" have been higher in the years when we have had a franchise fail".
Mr Hunt said there should be a governing body to impose ethics codes, sanctions and fines.
Signature was a member of the Franchise Association of New Zealand, which has its own code of conduct and ethics.
Signature had never been censured and had won a leadership award from the association, he said.
"There is a lot of smoke and mirrors involved in the selling of homes in New Zealand, now the Australian model has been introduced over here.
"It is very easy for clients to believe they are getting more in their homes than they actually are and are paying less for their home than they end up paying," Mr Hunt said.
For that reason Signature had introduced its own No Hidden Extras Guarantee and a Maximum Price Guarantee; "both very effective and strong products".
Anecdotally, some branded franchise companies may also owe some home owners credits or compensation running into tens of thousands of dollars individually but there is no central point where any alleged debts are collated.
Aside from the millions of dollars stripped from local economies by liquidations, southern home owners and contractors have alleged they are owed credits and compensation under their contracts, some going back several years.
A Cromwell woman estimated she was owed more than $100,000, a Dunedin family more than $50,000, Southland contractors $140,000 and a Dunedin builder $12,000.
In a cruel twist, Dunedin liquidators of failed Murwil Construction earlier this month said they were "relinquishing" the claims of about 20 Signature homeowners; the allegations and counter-claims being too complex and there was no money left to pay anyone.
All of those 16 homes have been completed and signed off, by either Signature's parent or the new franchise owner.
Mr Hunt said a "further learning from these unhappy events" was Signature developing a Home Completion Guarantee "in the event that a franchise cannot complete their home for any reason".
"It is this product which has enabled us to complete all of the clients' homes affected by the Murwil [Construction] failure," Mr Hunt said.
Signature franchises
As at July 2010
South Island: Nelson, Southland and Otago
North Island: Whangarei & Northland, Rodney & Kaipara Districts, North Shore & Central Auckland, Waitakere, Manukau, Papakura/Franklin Districts, Coromandel, Hamilton/Waikato, Tauranga & Western Bay of Plenty, Rotorua, Whakatane & Eastern Bay of Plenty, New Plymouth/Taranaki, Hawkes Bay and Palmerston North/Manawatu.
