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Message from the CEO – July 31

July 31, 2018

The Federal Government’s Parliamentary Franchising Inquiry is now well underway – the findings of which are due at the end of September.

As an attempt to establish the fact among the fiction, the Inquiry has been honing in on areas like how the Code is being operated and its effectiveness, dispute resolution, termination rights, unfair contract terms, reporting obligations and disclosure of information.

We know that franchisees operating under unscrupulous franchisors are effectively powerless when it comes to franchisor abuse, and will suffer tremendous financial losses as a result.

Franchisees can also suffer simply from poor business management franchisors – while the intent may be honorable, poor business practices such as over-borrowing, over-spending, expanding too quickly, clumsy internal systems, inconsistent agreements between the franchisees network or inadequate back end support will no doubt lead to problems for everyone.

This is why it’s absolutely non-negotiable for every future franchisee to invest into the necessary independent financial and legal advice.

But what happens when the tables are turned, and there is an unscrupulous franchisee (or several) who thinks that Australia’s Industrial Relations framework does not apply to them, and the first a franchisor hears about it is via the media?

When franchisees are exposed for systematically and intentionally exploiting workers, it’s inevitable the franchisor’s reputation ends up suffering. And badly.

It can also then infect the entire store network (most of whom are working hard and doing the right thing by their staff) as consumers protest with their feet. They can and will boycott an entire chain based on the misdeeds of a few, and this is a significant risk for everyone involved.

It’s just as important for franchisors to do their own due diligence on who they welcome into their store network. Take McDonalds for example – franchisees must meet a very strict level of criteria in order to qualify, but also must invest significant capital to end up opening a restaurant.

It’s an effective way of ensuring that the brand doesn’t end up being dragged through the mud due to poor business practices, or worse, unscrupulous practices, by a franchisee.

On the opening day of the Parliamentary Inquiry hearings, HWL Ebsworth Special Counsel Derek Sutherland said that government could not legislate to protect people from their own poor conduct when they signed up to be franchisees.

“They’re not taking enough interest at the time when it matters, to really get some advice and make an informed decision,” he said at the time.

Mr Sutherland went on to tell the Inquiry that while franchise agreements clearly state that small business owners should get financial and legal advice before entering an agreement, in practice, many didn’t, because they didn’t want to spend the money.

What has emerged over recent times is that despite the scandals, the franchise system is still working incredibly well for a great many people – and has done for half a century – however when things go wrong, it’s usually through business mismanagement. And that can be on both sides of the fence.

So while we wait for the results of the Inquiry, it’s clear that proper due diligence, including enlisting professional, independent legal and financial advice, is the key to getting the foundations right for any franchise relationship.

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