The break-up: What happens when franchises go wrong


Does the code of conduct help or hinder?

 

He says franchisees have rights under the franchising code of conduct.

 

Furman says: “The franchising code of conduct has specific provisions about how to deal with disputes. It has a step-by-step system and provides for mediation, which is an informal way of attempting to resolve a dispute and the franchise agreement itself is a contract.”

 

“It’s a source of rights and obligations for both parties. You have an overriding code of conduct which is compulsory as also you have a private contract which specifically negotiated rights and obligations.”

 

The then small business minister Brendan O’Connor last month announced a review into the franchising code, set up by the Howard government in 1998, which ensures prospective franchisees receive key information about a franchise before making a financial commitment and entering into a franchise system and ensures they have certain rights in their ongoing franchise relationship.

 

Under the code, franchisors have to ensure franchisees are aware of all the company’s particulars, and must follow set procedures when dealing with franchisees.

 

But Furman says it needs fixing.

 

“In relation to disclosure, I think it would be good if you had to on the front page of the disclosure document sign a statement of minimum financial agreement,’’ he says.

 

“I think it would be much more user friendly if it had on the front page of the agreement a simple sentence saying if you’re entering this agreement, the simple financial commitment is X.”

 

“Also, if you break the provision there should be a fine payable. Today if a franchisor breaches the code, there is no immediate consequence. There may be nothing as a result of the breach.”

 

“It really is up to the franchisee to go to court and prove they suffered loss as a result of that particular conduct.”

 

But Stephen Giles, deputy chair of the Franchise Council of Australia, says there is no need to change the code, which has all the legal weight of legislation.

 

“The bottom line is Australia has the best regulatory framework in the world, the code is very strong on disclosure and all the information has to be provided. The franchisee has protections if there is any misleading conduct or misrepresentations, the Competition and Consumer Act applies,” Giles says.

 

“And if there is an issue where there has been illegal conduct, they should go to someone like the ACCC and they’ll find if they move quickly, all these problems will tend to sort themselves out.

 

“The code contains almost a fool-proof process for people to make an informed decision if they follow the system. The problem often derives from when the franchisees don’t get advice.”

 

Buyer beware and get good advice

 

The failure to get good advice before entering an agreement is the big problem, he says.

 

“Once you make the decision, you are entering into a long-term relationship and it is subject to the contract and you can’t change your mind half way through. Often people will get legal advice when they’re buying a house and it’s surprising the number of franchisees who won’t spend a little bit of money to get good legal and business advice.

 

“Typically if the business is running well and making profits, like a marriage, there is not a problem; but if there are financial stresses involved then the franchisee and the franchisor are both impacted by that, there will be a problem,’’ he says.

 

“If you have a franchisee who hasn’t been as successful as expected, it’s a fundamental human coping mechanism to say it wasn’t my fault.

 

“It’s unusual these days with the strong regulatory environment for there to be any systematic inappropriate behaviour by a franchisor who is on to that. There is a strong regulatory framework and a pretty well informed franchisee market place so pretty well most of the disputes are about business issues and expectations and dreams.”

 

So if the system is so good, why are there still disputes?

 

“Most of the disputes tend to be mismatched expectations,’’ he says. “A lot of the surveys show people consistently underestimate how difficult it is to run a business, how taxing it is personally, how time consuming it is.

 

“Also, the franchisor might say the franchisee is not following the system, the franchisee might say the problem is I misunderstood the nature of the relationship, the franchisor is not doing what they are supposed to do.”

 

Giles says problems are best handled by mediation or by franchise advisory councils that many franchise operations have running. This will allow them to talk to other franchisees. “If they’re having a problem, then others might be having the same problem,’’ he says.

 

Keeping lines of communication open

 

He says regular communication is another way to avoid the problems. “The good franchise systems really focus on communicating frequently and effectively with their owners because the people who buy a franchise business want to be part of a team, they want to have a collaborative relationship and they want to have the support they need.

 

“Sometimes there are disputes which are essentially communication breakdowns.

 

“It’s a bit like a marriage. If you stopped communicating with each other, then sometimes the relationship breaks down for that reason.”

 

Peter Buckingham, managing director of Spectrum Analysis, which advises the franchise sector, says one way to avoid disputes is for the franchisor to have good modelling analysis of the market.

 

“If the answer is based on a wet finger in the air, I say go look for a new franchise system that will do better than that,’’ Buckingham says.

 

“The Act says you have to do your own due diligence. Different companies have different levels of assistance to do that. Some of the good companies will actually give you a list of the other franchisees and say give any one of these a ring and have a chat.

 

“If you did take that liberty and you rang five or six franchisees and visited one or two and everyone was rosy, you’d be feeling pretty comfy.

 

“Also, a lot of the franchisors now do a lot of psychographic testing of people to see if they’re suitable to be a franchisee.”

 

And as a franchisee, you have to ask a few hard questions and probably ask for analogue modelling.

 

He says bigger franchises provide that sort of modelling but smaller ones don’t.

 

“A lot of people go into smaller franchises, small chains and chains getting started and you can only look at what you can look at,” he says.

 

Buckingham says franchisees tend to take action “when everything turns to crap.”

 

“Normally these things don’t end up in court,’’ he says. “The code of conduct and the whole franchising documentation is very much about seeking a mediator as soon as possible.

 

“Most franchise agreements have a dispute resolution tactic that normally brings these things to a head because most people are pretty gun shy about going to court.”

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