“Franchising is like a marriage”: As parliament launches its inquiry into franchising, here are the questions that must be asked

SmartCompany, March 23, 2018

The federal parliament will soon commence an inquiry into the world of franchising, after Nationals Senator John Williams successfully passed a motion on Wednesday to have the sector examined.

The senator passed a motion yesterday authorising the Joint Committee on Corporations and Financial services to dig into the business model of franchising after a string of high profile franchising horror stories have emerged in recent years.

Small Business Minister Craig Laundy has worked with Williams on the terms of reference for the inquiry, which will authorise the Committee to investigate the full effectiveness of the national Franchise Code of Conduct and Oil Code of Conduct, as well as the effectiveness of the introduction of unfair contract laws in November 2016 and how these help to protect franchises.

It will also consider the “adequacy” of termination provisions for contracts that fall under the franchising code, and how effectively breaches of the code are enforced when they occur.

In a statement, Senator Williams said the inquiry will look to address transparency issues in the sector to help ensure franchisees are protected from some of the “horror stories” he has heard about how badly some franchisees have been treated by large franchisors.

Williams says he has heard of instances that “include misleading financial figures being provided before agreements were signed, franchisees forced to purchase products from suppliers authorised by the parent company when they could be purchased cheaper elsewhere, and a lack of transparency over lease agreements and dispute resolution”. Such cases all deserve scrutiny, he says.

The Franchise Council of Australia has said it will engage with the inquiry, and has urged all stakeholders involved in the “success” of franchising to make a submission to the inquiry.

“This will assist the Committee to identify the causal factors, including third party conduct by parties outside the franchise relationship, and the role of the franchise business model and its contribution to business viability, when considering cases of poor commercial outcomes,” executive chairman Bruce Billson said in a statement.

This inquiry will be one of several reviews of the franchising sector that has been undertaken in recent years, with the last review of the Franchising Code of Conduct in 2013 resulting in legislative changes to the information franchisors must include in disclosure documents.

The concerns about Australia’s franchising sector are varied, and the subject of increased media attention. From concerns about the profitability of businesses to what happens to franchisees when a company collapses and patterns of franchisees routinely underpaying staff, there’s no shortage of alarming stories.

Conversely, many people involved in the sector say such “negative stories” detract from the successful franchising models that do exist in Australia.

So with so many elements on the table, what should this inquiry spend the most time on? Three people who have been involved with the sector for years share their thoughts.

Chris Levy – Former chief executive of Pizza Hut Australia and Sizzler Restaurants Australia

Focus on the diversity of franchising and seek examples of good communication models 

“There are going to be people up there in this inquiry who have a lot of complaints about the sector — but my estimate is that they actually represent at most 10% of the sector overall. 

Franchising is like a marriage. You have to keep working at the relationship between franchisee and franchisor, just like a good marriage: if people stray off to one side, then that’s going to ruin it. There should be a focus on that and how good franchisees have worked at that relationship. 

The fundamental thing should be to have happy franchisees that are making money, that’s when things go well. And there are so many business-to-business franchises out there that we should hear from [in this inquiry]. Not all franchise businesses are food businesses, many of them are business-to-business, and they are mostly very good.

There are crooks in every industry, and some have in the past used franchising as a base. But you can’t blame all franchising for that — just like you can’t blame all motorbikes because there are a few guys in bikie gangs.” 

Jenny Buchan – Professor of taxation and business Law, University of New South Wales

The powerlessness of franchisees must be addressed

“What is a real problem in franchising is when there is what the economists would call a ‘shock’ delivered  by the franchisor. This is when a franchisor decides maybe they need to get their money out, or do something like sell the system. That’s really tough for franchisees, and franchisees are never consulted on this in a meaningful way … A useful inquiry would seriously address the impact of these big shock events, and give franchisees rights to participate in some of these decisions. 

Give them a meaningful stake in those decisions [like selling or changing the franchise network]. It wouldn’t just be about giving franchisees one vote, it would be about looking at the investment that they have an letting them have a say.” 

Marianne Marchesi, franchising law expert and principal at Legalite

We must look at the costs of taking franchisors to court 

“When the [Franchisng] Code was reviewed a couple of years ago, there were some great protections put in place. Now it’s a question of the effectiveness of those protections, and the actual ability of franchisees to rely on those protections. To rely on them, really, a franchisee has to incur significant costs and time. 

We need to look at whether there’s some other alternative that might be available to them, and whether there could be a different approach where a body like the ACCC could step in and more readily issue infringements, rather than the onus of the case being on the franchisee.”

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