The country’s largest hair removal operator Laser Clinics Australia (LCA) has become the subject of legal action after a group of its franchisee clinics lodged a letter of dispute, seeking $80 million in compensation.
According to an investigation by the Sydney Morning Herald and the Age, 52 of LCA’s franchisees lodged a 140-page letter of dispute claiming the company has “gouged them on costs for equipment and supplies, while forcing them to conduct aggressive discounting”.
According to the Age, “things began to unravel” for franchisees when the original founders of LCA, Alistair Champion and Babak Moini, sold their stake to Sydney Private Equity firm Archer Captial in 2014.
Three years later, Archer Capital then sold 100% of the chain to American private equity firm KKR.
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‘Shock events’ can expose franchisees to risk
Jenny Buchan, a professor at the University of New South Wales’s school of taxation and business law, tells SmartCompany she is not surprised the group of LCA franchisees are seeking compensation from the franchisor.
Buchan says “shock events” — such as when a franchise is sold to a private equity firm, becomes insolvent or is publicly traded on a stock exchange, often leave franchisees exposed to financial risk.
“Each of those situations exposes franchisees to the risk of opportunism by the people who then become the principal owners of the franchisor,” Buchan says.
After buying the franchise, KKR increased the number of clinics from 60 to 160 and expanded into New Zealand and the UK, making LCA the largest non-surgical cosmetic network in the world.
During this period of expansion, the Age suggests KKR led a strategy of ongoing sales promotions and price discounting that created price expectations that were not viable in the long term.
Buchan says problems for franchisees can arise when the franchise they bought into is sold to a private equity firm.
“There are situations where sale to a private equity firm can work. But my sense is that it works best when the original owner retains a significant stake.”
The Age claims leaked documents from current and former LCA franchisees and staff suggest KKR implemented its expansion strategy in preparation for a trade sale or ASX listing, without considering how it would affect its franchisees.
The franchisees are now seeking $80 million in compensation, based on mark-ups LCA allegedly receives from the products and laser machines it has sold to franchisees, the cost of discounting on the franchisees and some of the fees franchisees have paid to a marketing fund.
LCA is “ready and willing to engage”
Laser Clinics Australia’s chief executive officer John Veitch told SmartCompany he could not comment on issues relating to confidential mediation, but said LCA was “ready and willing to engage in the process”.
Veitch said most of the franchises are built on a 50-50 joint venture model, meaning that the franchisee and LCA have an equal stake in the clinic.
“So, our interests are always strongly aligned,” he said.
“We will continue working closely with all franchise partners in our network … while being fully compliant with the obligations outlined in our franchise agreements and under the ACCC’s Franchising Code of Conduct.”
Calls for amendments to corporations law
Professor Buchan says disputes in the $180 billion franchising sector are likely to continue, given the federal government has not implemented the majority of the recommendations that came out of the most recent parliament inquiry into the space.
For the system to improve, she says corporations law must be amended so franchisors have obligations to franchisees outside of the Franchising Code of Conduct, which is administered by the Australian Competition and Consumer Commission (ACCC).
Large firms, which are bound by corporations law, have a disproportionate legal responsibility to their investors and shareholders compared to their franchisees, she says.
The letter sent by LCA’s 52 franchisees seeks to resolve the dispute through mediation. If this fails, a court proceeding could go ahead.