Major franchise brands accused

"Litigation is too expensive and time consuming. Predatory franchisors will beat them every time because they have the deepest pockets," Fraser says. Farrell says that when word spread that the NFIB was investigating in Perth, "four of the 25 Lenard's franchisees turn up in tears. This is just the tip of the iceberg."
October 19, 2007

Major franchise brands accused
Kristen le Mesurier

Some of the biggest brands in franchising are being accused of fraud, collusion, and unconscionable conduct against their franchisees.

More than 30 disgruntled former franchisees from Bakers Delight, Lenard's Chicken, Midas, Michel's Patisserie, Hungry Jacks and Howard's Storage World have joined forces to take on the franchise chains.

After two years of lobbying for support from industry groups and politicians on both sides of politics, the most vocal of the franchise owners, Deanne de Leeuw, was told by the Australian Competition and Consumer Commission last week that the watchdog is close to bringing an action against Bakers Delight under the Trade Practices Act on her behalf.

"I was told that my complaints had been examined by the ACCC's enforcement committee, and that their senior investigation team had been told to move the top six cases - of which mine is one - to the very last stage of investigation.

''I was told that the cases with strong enough evidence will be taken to court," said Ms de Leeuw, a former Bakers Delight franchisee who has spent the last two years fighting in her own right in the Industrial Relations Commission.

The ACCC will not comment on any investigation that is ongoing.

The chief financial officer of the 700-store chain Bakers Delight, Richard Taylor, denies all wrongdoing and says each complaint is without merit.

"I spoke to the head of enforcement at the ACCC a couple of weeks ago and was told that a number of complainants were being advised that their complaints would not proceed further ,'' Taylor says.

''There were also a number of cases that [the ACCC] would review further. I would add that there's a long way between that and moving to a prosecution."

At the centre of these 30-plus claims is what is known as franchise churn. This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold.

The franchisor reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track.

Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees.

Royalties and annual franchise fees, which range from 5-20 per cent of revenue, are owed on top of this.
Business failures are easily pinned on the franchisee.

Poor management, ineptitude, a refusal to follow the franchisor's business model, or inadequate market research before the franchise was bought explain cases of insolvency, argue franchisors and the Franchise Council of Australia.

Federal Minister for Small Business, Fran Bailey, said last week at the National Franchise Convention in Melbourne that the majority of disgruntled franchisees have themselves to blame for not conducting enough due diligence before buying franchises.

"That is absolute and utter garbage," says John Farrell, the president of the National Federation of Independent Business, to Fran Bailey's comments. "Churning has become endemic in Australia."

For the first time, the ACCC agrees. Chairman Graeme Samuel surprised the franchise industry on October 6 when he admitted during a 2UE interview that churning is a problem that the ACCC is tackling.

"It would be putting your head in the sand to insist there are no rogue [franchise] operators. Of course there are. In some of the rogue situations, in very serious fraud cases, we'd be taking criminal prosecutions," Mr Samuel said in the interview.

Farrell, who says he is "up to his eyeballs" in complaints because franchisees feel they have nowhere else to turn, goes so far as to say that there are two streams of franchise operating in Australia: the franchisors and the robbers.

"All you've got to do is follow the money trail. In the robbery stream, the franchisor virtually drives the franchisee to the wall to the point where they throw up their arms, leave behind them assets worth 10 times [what they are sold for in a fire sale] and so it goes on," Farrell says.

The fear is that churning in Australia is grossly underestimated.

Most franchisees never air their complaints because by the time they realise what's happening the bank has called in their debt and they've lost the family home, says Tony Fraser, the president of the Franchisees Association of Australia.

"Litigation is too expensive and time consuming. Predatory franchisors will beat them every time because they have the deepest pockets," Fraser says.

Farrell says that when word spread that the NFIB was investigating in Perth, "four of the 25 Lenard's franchisees turn up in tears. This is just the tip of the iceberg."

Ms de Leeuw's claims surfaced in Federal Parliament in March when Joanna Gash MP alleged that Ms de Leeuw had been the victim of an "orchestrated robbery" of three of her Bakers Delight franchises in New South Wales. Losses hit more than $2 million and Ms de Leeuw is fighting bankruptcy.

Claims of "unconscionable conduct" made by Mrs Gash against Bakers Delight included fraudulent accounting practices; the removal of marketing and business support based on a fabricated breach; collusion with ANZ Bank to create financial distress; inducing financial duress to force a fire sale of the business; and physical and financial intimidation and threats that were referred to NSW Police.

"It is totally unacceptable that any small business can be subjected to intimidation, commercial or criminal, without recourse to some form of effective protection," Mrs Gash said in Parliament.

While Bakers Delight's Taylor would not comment specifically on why Ms de Leeuw's franchises went under because it would be "inappropriate", he denied they were a case of churn.

"I have some real difficulties with some of the things Ms de Leeuw says," Mr Taylor said.

"We participated in mediation and we don't terminate franchise agreements lightly. That is a last resort. And only when the relationship deteriorates or there are irreconcilable differences or unrecoverable financial difficulties."

An unresolved debate is whether franchisees need more legislative protection. The ACCC maintains that the Trade Practices Act and the Franchise Code of Conduct, which is codified in the TPA, is strong enough.

The TPA's unconscionable conduct provisions were tightened in September and the Franchising Code of Conduct was reviewed and strengthened in August.

Mr Samuel said in the interview with 2UE that whether or not a claim can be made to stick boils down to evidence.

"I think we can prove [unconscionable conduct in the courts], the difficulty is getting the allegations stacked up by those provide the complaints."

Mr Farrell lays the blame on a small, under-resourced enforcement team at the ACCC.

"The TPA is adequate, the enforcement folks are inadequate. In eye-ball dealings with the ACCC this is utterly clear.

''They simply swallow the platitudes and general bullshit offered by franchisors because they haven't got the background and training to ask the right questions about the unconscionable conduct that's taken place. This has been made clear to Graeme Samuel," Farrell says.

Either way, the changes to the code, which come into force in March 2008, create important new rights for franchisees.

Franchisors will be compelled, subject to privacy laws, to provide the names, location and contact details of previous franchisees and prospective franchisees will also be able to find out whether any franchisees had failed before them.

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Risks: Australian Competition and Consumer Commission, ACCC, Blame the franchisee, Blue chip, Cannon fodder, Can't afford to sue, Churning (serial reselling), Collaborators, Conspiracy to commit fraud, Conspiracy to market and sell a doomed to failure franchise, Criminal charges, Deanne de Leeuw, Disgruntled, Due diligence cannot predict or prevent post-sale franchisor opportunism losses, Due diligence cannot stop a predatory franchisor in the future, Due diligence is irrelevant, Excuse du jour, False sense of security: doing pre-sale due diligence, Financial failure of first franchisee a material fact to the second, Follow the money: franchising re-distributes (not creates) wealth, Franchisee abandons their investment, Franchisee leader, Franchisor financing: faster in, out & resold (serial bankrupts), Franchisor picks up stores for a song, Fraud, Fraud is widespread, Fraud victims many times do not step forward , Political champions, Regulator already has enough power but they don't use it, Symbiotic relationships (industry, banks, lawyers), Threats against franchisee advocates, Threats of physical violence, Tip of the iceberg, Trap for the trusting, Unconscionable conduct, Australia, 20071019 Major franchise

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