UNSW UNSW Business School UNSW Business School

Franchising isn’t everyone’s pie or muffin, but it could be

By Jenny Buchan  June 20, 2018

​Franchising can be a great way to grow a business but the scrutiny it receives is well founded.

Franchisees are airing their pain before the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, and the present parliamentary inquiry into the nation's embattled franchise sector suggests we do not have the regulatory balance right yet.

After all, we've had two state inquiries in 2008, the Fair Work inquiry in 2017, and government inquiries in 2006, 2008, 2009, 2014 and now in 2018.

The present one will scrutinise the relationship between the franchisor's brand businesses and franchisees' running operations on the ground, but what will it take to get franchising back on track?

We're not talking about a sports team franchise; this is business format franchising. It used to be simple – a franchisor worked out how to make and market a killer burger, registered the golden arches trademark, wrote down how to set up and run a burger business, then sold the right to copy it to franchisees.

Hey presto! The golden arches are cloned worldwide. Everyone's happy.

However, franchisees remain powerless in the face of franchisor abuse. The Franchise Council of Australia will deny there is anything that couldn't be fixed with a small tweak. The status quo suits franchisors. Australian franchising is already the most regulated in the world, they'll cry. Leave us alone!

It’s time we took a reality check on the role of todays’ franchisees, how they are financed and how money and control flow through franchise networks

The franchisors mantra is that struggling franchisees have only got themselves to blame. They should have done better due diligence.

But not all franchisors are perfect. Some mismanage their own businesses, over-spend, or get ahead of themselves by trying to expand overseas before they are solid in Australia.

Sometimes the economy plays the same tricks on franchisors that it does on other borrowers. Access to cash dries up, loans are called in, businesses stagger, or fail. Maybe we'll find the bankers are to blame.

In the 21st century, franchising has matured. The burger may remain the same, but franchised businesses have transformed since the 1998 regulations were made.

There are new players upstream of the Australian franchisor; public companies and foreign-based franchisors, such as the Japan-based owner of 7-Eleven.

They are several legal steps removed from the franchisees. Their decisions affect franchisees though. They may set the licence cost without considering whether the cost of borrowing will leave the franchisee earning below a minimum wage.

They may change what the franchisee can sell. Or insist on fries still being cooked in palm oil when the public demands we stop using it. These decisions can make the difference between a profit and a loss to franchisees.

The franchisor may sell its business. Public companies and venture capital have latched on to the 'easy' revenue that flows from franchising. The buyer may introduce sweeping changes without consulting the franchisees.

They're also awake to the lack of accountability that goes with being a franchisor. No one at the Australian Securities and Investments Commission is going to ban a franchisor's director for making a decision that hurts their franchisees.

The franchisee's business does not belong to the franchisor. Franchisors and franchisees have contract-based relationships.

If a contract is breached the route to justice is via the courts, which is slow and expensive; mediation (submissions to the 2018 parliamentary inquiry into franchising shine a light on what can happen there); or negotiation. And many franchisees have found that rarely works – you can't win when you hold no trump cards.

What it will take to fix franchising is for franchisors to stop saying the status quo is fine. It's time we took a reality check on the role of todays' franchisees, how they are financed and how money and control flow through franchise networks.

We need to consider why franchisees can't conduct meaningful due diligence, and what rights franchisees should have if their franchisor fails. We need to re-think whether the consumer law can do all the heavy lifting here.

As retired New Zealand judge, Sir Edmund Thomas, says: "A law that is out of step with the needs and expectation of the times is not serving the society it is designed to serve. It is failing in its basic function."

We should care because Australia has more than 70,000 franchisees. They include former wage earners, professional athletes, military personnel, and immigrants – all capable people.

There are presently significant doubts about the capacity of disclosure laws to protect naturally optimistic franchisees from prospective hazards.

It's time for a root and branch change, to hopefully prevent yet more franchisees appearing before another royal commission, explaining why they've not only lost their business, but their families and homes, too.

Jenny Buchan is a professor in the school of taxation and business law at UNSW Business School.

comments powered by Disqus