Monday, March 19, 2007/
The biggest franchising market in the world is now easier for Australian entrepreneurs to crack.
The USA is our oyster
Good news for Australian franchisors interested in doing business in the United States: changes to franchising laws in the US will make it easier to get started in what is arguably the biggest market for franchising in the world.
From July 1, the rule that franchisors have to deliver disclosure documents to a prospective franchisee at the first “personal meeting” is dropped.
Instead, franchisors have to give the disclosure documents to prospective franchisees at least 14 days before the buyer pays any money to the franchisor or its agent, or 14 days before the franchise agreement is signed. You can see the new rules here.
Carl E Zwisler, a US franchising attorney, says that many people interpreted the old rule as meaning that you couldn’t have any discussions with potential partners or even attend a franchise expo without having a $US20,000 “uniform franchise offering circular” (UFOC) prepared. It was a big turn-off.
Now, he says, Australian franchisors can have discussions with potential partners, work out the best business model — unit franchising, area development franchising, or master franchising — before having to set it all out in the disclosure document. It can then make a better estimate — as it must — of the franchisee start-ups costs, for the disclosure document.
There are some exemptions to the rule: Sophisticated investors, who have been in business for more than five years and have a net worth of $US5 million; franchises requiring an investment of more than $US1 million; and a franchisor’s long-term managers.
As the US is relaxing its laws for foreign franchisors, we are tightening ours. Currently foreign franchisors granting only one franchise or master franchise in Australia do not have to comply with the mandatory Franchising Code of Conduct and its disclosure problems. This is about to change.
The old exemption has created problems where foreign franchises have re-sold one franchise — over and over. The subsequent potential franchisees have no right to the knowledge of the previous failure — the franchisor has no obligation to tell them.
In August 2005 the American chain Wetzel’s Pretzels had sold the Australian master franchise three times. It was not required to tell the buyers about the previous failures. The third buyer, teacher Rob McPherson, paid $100,000 for an area development agreement, which was later rolled into a master franchise.
After selling four franchises, McPherson relinquished his rights and went back to teaching. He said at the time he couldn’t make the chain work here because he didn’t get enough support from the American franchisors. He had no idea about the previous attempts to get the franchise going in Australia.
The problem is that there are a whole army of sales consultants who fly around the world selling franchises in overseas territories on behalf of foreign franchises. They have less invested in the business succeeding in Australia than their franchisor clients, but plenty invested in getting a sale. It can create problems for inexperienced potential buyers.
So it’s good news then that the review into the disclosure provisions of the Franchising Code last year recommended that foreign franchisors are subject to the same rules as locals. And the Federal Government has agreed, so there are likely to be changes to our laws soon.
But, maybe we should have a sophisticated investor exemption, like the United States. What do you think?