Franchisees must put up or shut up

…ACCC is giving lip service to franchise regulation. "There have been no significant prosecutions, few - if any - fines, for disclosure documents not being provided to franchisees or for wrong disclosure documents being provided," he says…should have a special section to police franchising."

The Australian
July 4, 2006

Franchisees must put up or shut up
Peter Switzer

THE federal Government has ignored the Franchise Council of Australia and bowed to public pressure to review key sections of the franchise industry's governing code of conduct.

This is the time for those franchisees with complaints to put up or shut up.

The federal Government's decision to review the disclosures section of the Franchising Code of Conduct is timely, if not overdue. And it could be better if it had a wider focus.

"Over the past few months, a number of concerns have been raised regarding the adequacy of the disclosures section of the Franchising Code," Minister for Small Business and Tourism Fran Bailey says.

"Most people in the franchising sector do the right thing, but given the level of concern, I have decided to review the disclosures section of the Code."

The focus will be the disclosures section, which specifies the vital information franchisors must reveal to potential franchisees before selling a franchise.

The mandatory code was introduced in 1998 and brought with it a mediation service to help resolve disputes.

The Minister was at pains to praise the industry, but was realistic about its problems.

"Overall, franchising is growing rapidly and an undoubted small business success story," Bailey says.

"Today, franchising is an $80 billion industry that employs more than 600,000 Australians. As Minister, my goal is to make franchising even stronger tomorrow than it is today."

After years of complaints from franchisees that the Australian Competition and Consumer Commission appeared powerless to help franchisees, and a number of failed attempts to launch franchisees associations, a recent CPA Australia report underlined specific problems with franchising.

Franchisees had little protection under insolvency laws when their franchisor collapsed, the study found.

Titled When the Franchisor Fails, and conducted by the University of NSW, the study found franchisees were badly exposed.

"Franchisees have no control over their future when a franchisor fails," CPA Australia's business policy adviser Judy Hartcher says. "They are often at the mercy of liquidators and administrators whose primary responsibility is to find the best outcome for creditors."

The study also found that franchisees of failed systems had no statutory voting rights at the franchisor's creditors meeting, as they are not usually recognised as creditors by law.

"The exposed position of franchisees when a franchisor fails supports the view that they have limited legal redress under Australian insolvency laws and there may be an opportunity for review," Hartcher says.

The accounting body welcomed the federal Government announcement that it would review the disclosure requirements, but it might not have been as well received by the Franchise Council of Australia.

The FCA's chief executive Richard Evans was not a fan of the CPA report. "We believe this research is weak in detail and analysis and pays no attention to the market, or due regard to the history of franchising, which provides a great opportunity for folks to be their own boss," Evans says.

He says the study is flawed on many fronts, containing numerous mistakes of fact. Some errors occurred because the bulk of the information was collected before the Franchising Code of Conduct came into force in 1998.

Garry Williamson of the Franchise Centre in Sydney, who wrote Own Your Own Franchise, thinks changes are needed. He believes better inspections of disclosure documents are essential.

"No one checks disclosure documents until they're before a judge," he says. "There should be more required than someone being a member of the FCA and having disclosure documents before a franchisee parts with their life savings."

He also thinks new franchisors should be forced to show financials from day one, instead of waiting a year. "Where a new franchisor has not been trading for 12 months no financials are provided," Williamson says. "A potential franchisee could be dealing with a $2 company."

Industry pioneer Howard Bellin of IF Consulting thinks the ACCC is giving lip service to franchise regulation.

"There have been no significant prosecutions, few - if any - fines, for disclosure documents not being provided to franchisees or for wrong disclosure documents being provided," he says.

"The ACCC should have a special section to police franchising."

He wants heavy fines for franchisors who fail to provide disclosure documents and for incorrect or incomplete disclosure documents.

"Franchisor prosecutions should be heavily publicised in the same way (former ACCC head) Allan Fels used publicity," he said.

In the US, policing involves asset freezes, monetary redress and civil penalties. One civil penalties case involved $870,000, while one franchisor forked out $4.9 million to make up for poor behaviour.

It is ironic that in the week the Government has agreed to review the disclosures section of the Franchising Code of Conduct, a battling franchisee, Ray Borradale, starts a new job after two years in the wilderness fighting his franchisor. (The franchisor's name has been withheld to ensure Ray does not encounter any future legal problems.) Ray and other franchisees fought their franchisor and lost, something that happens too often in Australia.

Franchising in this country is in good shape with some fantastic businesses, but there are cracks in the industry's floor and fair dinkum people like Ray Borradale fall through. And bullies with deep pockets and smart lawyers are responsible for doing the pushing.

The same bullies and lawyers, of course, also beat up on some franchisees, who cause their own failure. For the sake of a good industry, in general, the cracks need to be closed.


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