The Blue Chip Scandal: The Franchise Deal

Stuff.co.nz:

On September 10 last year, listed company Blue Chip Financial Services spun off its New Zealand operations to a newly created entity called Diem Ltd.

Diem was owned by the three senior managers who ran the NZ operation, Neil Bell, Rikki Flowerday and Blue Chip’s co-founder Bob Bangerter.

The arrangement was that Diem would run the New Zealand business on a franchised basis and pay the listed company a fee of $22,500 for every property investment package it sold.

The deal was sold to BCFS’s shareholders in jargon-loaded terms which talked about “quarantining legacy issues within the NZ franchise” without explaining exactly what those legacy issues were.

But the main selling point for BCFS’s shareholders was that the deal would provide the listed company with “significantly improved operating cash flows”.

There is no doubt that the new deal was beneficial to BCFS and its shareholders.

Under the old arrangement, BCFS received most of its income from the deposits investors paid when they signed up for a new property package and the balance of the purchase price when the property was completed.

From this income the company had to pay all of its operating expenses, such as paying the developers for the apartments it was on-selling, the commissions of its sales staff and other marketing expenses and all of the other costs associated with running the business.

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