The Australian, Entrepreneur
A well-meaning government code to clear up franchisee confusion may be badly flawed, reports Ed Charles
March 30, 2007
GOVERNMENT moves to make the franchise industry more transparent have been cautiously received by the $128 billion sector, with worries it will lead to more red tape and increased costs and that important elements have been left out.
Chris Malcolm, founder and managing director of Clark Rubber, which last year was awarded franchise of the year, says the Government is looking for a little more transparency and disclosure. “In the end that’s a good and healthy thing,” he says.
Franchisees are investing their savings and need to know warts and all what they’re getting into, he says.
John Brown, group chairman of consulting group the Franchise Alliance, says there are several areas that have been ignored in the proposed code. About 95 per cent of franchises do succeed, but the ones that fail often do so because the people recruited either haven’t the proper experience to run a business or haven’t taken advice. “I was surprised they didn’t focus more in a couple of areas, particularly in the area of working capital requirements,” he says.
“There’s also a suggestion that franchisees get advice, and they don’t. That’s another area where the code could have been tightened up.”
Brown says mature franchisors won’t sign up a franchisee unless the person can demonstrate advice has been taken from an accountant and/or lawyer. The cost of advice is about $1000 to $5000 compared to the hundreds of thousands of dollars of personal savings that may be invested in the business.
Kate Marshall, a partner specialising in drafting franchise agreements at law firm Clayton Utz, says it is critical that franchisees get advice.
“It’s the most important factor in trying to minimise franchise failures. It is ensuring that a franchisee goes into any franchise arrangement having a full understanding of what they are getting into and having reasonable expectations and not just taking on a franchise because they like sandwiches, or they like juice.
“It’s got to be a sound commercial business decision. I think it’s very difficult for franchisors that some people will want to take on a franchise because they like the product that is being sold rather than actually making a sound business decision.”
Clark Rubber’s Malcolm, who worked on the original franchise code, says failed franchisees often want to blame someone. “You can’t legislate against failure,” he says.
He says the reality is that the last resort is termination of a franchisee. “It’s bad for everyone,” he says. Clark Rubber tries to ensure success for its recruits through a simple, clear franchise agreement written in plain English rather than legalese.
And if there is a breakdown in a relationship with a franchisee, the company uses mediation rather than turning to expensive litigation.
“In the history of what we’ve dealt with, we’ve been to mediation three times. Two of them have worked and one failed,” Malcolm says.
Among the most important proposed changes is that franchises will need to keep a register of the contact details of former franchisees so that potential partners can contact them, and the fact that foreign franchise systems have to abide by the code.
The idea is that new franchisees can contact former ones to check if there are problems with the system.
The Franchise Alliance’s Brown says large franchise systems may have several thousand franchisees on a database that needs to be maintained.
“For very large systems it would be very onerous for them to do that,” he says.
He was also disappointed that there are no plans to introduce a government register of franchisees that would help collect data on an industry that employs 600,000 people.
But Brown says there are still many positives in the proposed code and the industry is still waiting for the exact details to be hammered out.
“The area that is probably most positive from our point of view is the requirement for advertising and marketing funds to be audited, irrespective of whether franchisors consider them to be audited or not.
“There are examples in the history books of marketing funds being perhaps being improperly used or applied or just not being used.”
PROPOSED CODE
A complete franchise agreement must be provided to a prospective franchisee in the form in which it is intended to be executed.
All copies of associated agreements and contracts must be provided, including leases, sub-leases, hire-purchase agreements, guarantees and confidentiality agreements.
All the agreements and disclosure documents should be provided at least 14 days before signing.
A risk statement by the franchisor should identify known significant risks that could affect the business. Details of termination clauses and what happens if the franchisee fails should be clearly explained.
Any rebates or other financial benefits received by the franchisor in the provision of goods or services to the franchisee must be disclosed.
The annual financial statement of marketing or other co-operative funds should be audited annually.
Names and contact details of previous franchisees should be provided to a prospective franchisee.
Overseas franchises should be covered by the code.