INSIGHTS

Change is inevitable for Australia’s franchise sector following the recent parliamentary inquiry. So what’s coming your way?

Franchise standards have to rise and franchising should provide better protections and rights for franchisees. That’s the conclusion of the franchise inquiry report from the Senate committee looking into the franchise sector.

FRANCHISING IS IN NEED OF A MAJOR OVERHAUL

There’s no doubt the committee views the franchising sector as ripe for regulatory and cultural change. It drew comparisons with the banking industry: “disclosure alone is an insufficient regulatory response to power imbalances and exploitative behaviour by powerful corporations,” it said.

It highlighted poor corporate governance at some franchises, and was sceptical of the role of shareholders in a franchise system.

For a franchisee to be well informed is not enough, “because the franchise agreement embeds the power disparity between franchisor and franchisee for the duration of the contract, including the exit arrangements”.

But it also recognised the diversity of the franchise sector.

And in seeking to achieve fairness in franchising as its framework, the committee acknowledged franchise models exist that do recognise the “mutual importance” of franchisor, franchisee and supplier.

So it has been careful not to impose “unnecessary burdens” on franchisors who are treating franchisees fairly.

“That said, the recommendations are designed to lift standards and conduct across the entire industry” due to the power imbalance mentioned earlier. Regulators need to be aware that franchisors have a greater voice than do franchisees and are therefore more likely to influence any debate about franchise policy.

FRANCHISE INQUIRY REPORT: WHAT FRANCHISE BUYERS NEED TO KNOW

The committee findings set out to achieve Fairness in Franchising, the title of the report. Overall the report outlined need to improve standards because “on the balance of evidence given to the committee in public and in confidence, far too many franchisors are abusing the power imbalance between themselves and their franchisees”.

The report aims to offer ways to rectify this imbalance. It wants franchisors to be more accountable for how they use marketing funds, and to divulge details of supplier rebates.

It wants to improve financial disclosure so that franchise buyers have guaranteed access to relevant financial figures when buying an existing business – provided either by a franchisor or the vendor franchisee.

There are suggestions on ways to deliver more information to franchise buyers as they research possible

investments with, in particular, a greater emphasis on the risks and responsibilities of taking on a retail lease.

The report also looked at wage theft in franchising and ways to reduce the incentives for engaging in underpayments.

The 369-page report, entitled Fairness in Franchising, included 18 pages of more than 70 recommendations. The report is a far-reaching analysis of the franchise sector’s performance and the regulatory landscape it operates in. It discusses pre-purchase education, disclosure, marketing funds, the cooling off period, goodwill, exit terms, restraint of trade, unfair contracts, third line forcing, supplier rebates, dispute resolution, finance and lending, collective action, retail lease arrangements, wage theft, capital expenditure, industry associations and the role and reach of the ACCC.

EMPOWERING THE ACCC

The committee wants the Australian Competition and Consumer Commission (ACCC) to establish a FranchiseSmart website for franchises similar to the MoneySmart service operated by the Australian Securities and Investments Commission (ASIC).

It also believes the ACCC should have more powers. The body that regulates the Franchising Code of Conduct should be able to stop franchisors who repeatedly market and sell a non-viable franchise from doing so. There should also be harsher penalties for misconduct.

And the committee wants franchisees to form a national association that can provide an alternative viewpoint to the franchisor-dominant Franchise Council of Australia (FCA).

A register of franchises in Australia could also be useful, the committee suggests.

One omission that has surprised a number of franchise experts is not making financial and legal advice mandatory for franchise buyers.

One of the report’s main proposals is for the government to set up a franchising taskforce. This body will include representatives from a number of different agencies such as the Department of Jobs and Small Business, and the ACCC.

The role of the taskforce would be to evaluate and implement the committee’s proposals.

IN MORE DETAIL

GREATER TRANSPARENCY AND DISCLOSURE

• Franchisors should provide more information such as assurances of accounting and code compliance, the disclosure document and franchise agreement to be available electronically as well as on paper, quarterly financial statements provided.

• Vendors (either franchisee or franchisor) to supply two years of Business Activity Statements and key financial data to the buyer – information for a comparable franchise must be provided if a greenfield franchise.

ENDING A FRANCHISE AGREEMENT

• In certain circumstances, franchisees should be allowed to end a franchise agreement.

• On the other hand, franchisees can only be terminated for special circumstances on seven days’ notice – providing there is no notice of dispute lodged by the franchisee in that time.

• More restrictions on terminating a franchise agreement for fraud or public health and safety.

ARBITRATION FOR DISPUTES

• Binding arbitration that can award compensation and costs if mediation is unsuccessful.

• Merging the Office of Franchising Mediation Advisors with the Australian Small Business and Family Enterprise Ombudsman.

COLLECTIVE ACTION

• Franchisees could collectively bargain with a franchisor without breaching the Competition and Consumer Act.

RETAIL LEASES

• Additional disclosure of occupancy

details.

• Franchisee power to terminate an agreement within six months if franchisor has failed to comply with lease disclosure rules.

THIRD LINE FORCING

• Amend the code to include two years of information on cost of production, margins and product prices.

• The taskforce to consider an inquiry into agreements that allow franchisors to exploit franchisees through over-ordering of supplies.

These are just some of the points the committee has raised in its report.

WHAT THE ACCC SAYS

A spokesperson for the Australian Competition and Consumer Commission told Inside Franchise Business the wide-ranging report will take the ACCC some time to consider.

“A number of recommendations align with concerns we have raised, for example, our call for civil penalties to be applied for all breaches of the Franchising Code, which the parliamentary committee has recommended a taskforce look at.

“If implemented by government, the ACCC would look forward to working as part of the franchising taskforce to consider the issues further in order to address the committee’s report and to provide advice to government for their response.”

The ACCC emphasised both the “significant resources” and the enforcement work devoted to franchising.

WHAT THE FCA SAYS

The peak body for the franchise sector has indicated it is looking forward to “constructively contributing to the Task Force and working to effectively implement both the changes we have underway and other recommendations of the inquiry”.

The FCA emphasised to the inquiry that there was a need for more rigorous compliance oversight and enforcement and reports it has been actively engaging with the ACCC.

A statement said “We are pleased that recent enforcement actions have successfully brought some unscrupulous operators to account with significant penalties.

“Any breach of the law by a franchise business reflects on the reputation of the majority in franchising whom do the right thing. Franchising works best when there’s open collaboration between franchisors and franchisees and the FCA is committed to ensuring their mutual success.”

WHAT FRANCHISE REDRESS SAYS

Franchise Redress describes itself as a communications, advisory and consultancy business that supports franchisees: former, current and prospective. The organisation also undertakes research and investigative work and has been influential in bringing to light some of the franchisee complaints that sparked the franchising inquiry.

Director Maddison Johnstone told Inside Franchise Business, “Our observations in the franchise sector pointed to problems that were not isolated to a few franchise systems. It was encouraging that the committee came to the conclusion that there are systemic issues in franchising as this will enable real change to be discussed and implemented.”

Johnstone said, “Churning of franchisees has been a problem that we have seen in large franchise systems, but also franchise systems that are trying to grow quickly.

“This obviously leads to a moral dilemma for franchisees who are trying to avoid financial devastation by selling their franchise, but know they are selling an unprofitable business to someone who will likely end up struggling financially.

“The committee’s recommendation of intervention powers for the ACCC where a franchisor has a track record of churning will be particularly helpful to these franchisees and could stop churn before it becomes heavily relied upon by franchise systems.”

Franchise Redress maintains that public access to disclosure documents will help franchisees and prospective franchisees in their business decisions.

Greater transparency will also assist the wider franchise community in advising and consulting franchisees and franchisors, Johnstone said.

“We know that franchisees would also greatly benefit from full disclosure of rebate arrangements with suppliers, and this is something that ethical franchise systems would be happy to disclose up front.”

WHAT HAPPENS NOW?

The Senate inquiry’s proposals are, right now, just recommendations and a federal election due soon after publication of this magazine throws uncertainty and delay into the mix. At this stage we don’t know what will be taken up by government.

While it is clear that the details of the report and the public sentiment lean towards regulatory changes, implementation of any amendments to the Franchising Code is likely to be some time off. In the meantime, franchise buyers would be wise to look more deeply into their shortlisted franchises.

One of the lessons learned throughout this inquiry was the lack of research done by some of the franchisees before they invested in their business. There is no substitute for good due diligence.

It’s already happening, as exhibitors at the Sydney Franchising & Business Opportunities Expo found: visitors were more knowledgeable than in previous years and prepared to ask franchisors hard questions about their business models.

There’s no doubt that change is coming. But the report is just the beginning of a process of change.