Franchising

Code confusion causes compliance concerns

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Amendments to the franchising code may aim to provide greater protection, but it is certainly causing confusion for franchisors.

 The introduction of amended disclosure provisions to the Franchising Code of Conduct from 1 March will provide greater protection for franchise buyers, but it is causing confusion among franchisors.

 

And it’s possible that some amendments may be interpreted differently.

 

Further uncertainty for the industry comes from the Ketchell case, where the NSW Supreme Court found a franchise agreement to be unenforceable due to a “technical” breach of the code.

 

The High Court has granted leave to appeal to the franchisor, and the franchise industry group is drumming up the funds to help it proceed.

 

Some clarity on the amendments to the code was provided recently when the small business policy division of the Federal Government revealed that the code’s prohibitions on release from liability will apply from 1 March 2008, not 1 October 1998, as previously thought.

 

This acknowledgement should give the franchise community hope that other confusing elements of the new code will be further clarified.

 

Regardless, key changes to the code, such as the requirement to include a list of former franchisees who have left, sold or been terminated in the last three financial years to prospective franchisees, remain.

 

This list requirement has been met with grudging acceptance by some franchisors concerned about the inconvenience of dredging through old files and determining franchisee consent to comply with this provision.

 

For those franchisors reluctant to, or otherwise incapable of providing this information, the perception that they have something to hide can become a reality in the mind of a franchise buyer.

 

The code has always required a franchisor to disclose the number of franchised businesses that were transferred, ceased to operate, terminated, not renewed or bought back by the franchisor. The amendments add a requirement that for each of these events, the name, location and contact details of the franchisee are also included if available, or unless the franchisee has requested in writing that the details not be disclosed.

 

Attempts to circumvent this provision would strike at the intent of the code to establish transparency for franchisees in dealing with franchisors, and have the potential to reflect badly on franchisors.

 

Indeed as both the number of past franchisees and the contact details for each are required to be disclosed, a potential franchisee will be naturally curious if the number of past franchisees and the number of contact details supplied are not a close match.

 

Given that past franchisees have the right not to have their details included, some will take this option. But in the main, it would be likely that those former franchisees, who have had both good and bad experiences in their business relationship with the franchisor, would be willing to speak to a potential new franchisee.

 

This provision arguably addresses the information imbalance between franchisees and franchisors at the point of entry, more so than any other provision in the code. The proof of the pudding is in the eating, and when franchisees can talk to others who have eaten and moved on, they will better understand the quality of the meal.

 

In the meantime, any further clarification on those elements of the amended code provisions, which are the source of ongoing uncertainty, would be most welcome by franchisors.

 

Jason Gehrke has a passion for franchising. He has been involved in the sector for 17 years as a franchisee, a franchisor, provided PR and marketing services to more than 30 leading Australian franchise systems, and presented to literally thousands of potential franchisees and franchisors over the years. He is a director of the consultancy Franchise Advisory Centre and is the immediate past CEO of automotive paint and plastic repair franchise, Kwik Fix International, a 2004 Australian Franchise System of the Year winner.

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