Cloaked in suspicion: franchises

"The big problem is that there's such an imbalance of power in the relationship [between franchisees and franchisors]," she says. "That transparency and trust, they're extremely important, and it's the franchisors that hold all of the information and if they don't want to share it then you have no way to get access to it." De Leeuw acknowledges critics who say franchisees must do their homework before entering a system, but says: "You can't plan for the conduct you might be subjected to once you're in that contract."

The Australian
May 28, 2010

Cloaked in suspicion: franchises
Cameron Cooper

OFTEN seen as one of the enduring success stories of the Australian economy, franchising has a dark side of mistrust and acrimony.

A new report, titled Towards Conflict Resolution, from Griffith University's Asia-Pacific Centre for Franchising Excellence, reveals 28 per cent of franchisees could not count on their franchisor to be honest in business dealings, while 30 per cent could not trust franchisors to keep promises.

Lead researcher and centre director Lorelle Frazer says although the study's findings raise some concerns, conflict is inevitable in all business relationships.

"What it probably tells franchisors is that they need to work harder at earning the trust of franchisees and not just take it for granted," she says.

The report, based on surveys with 350 franchisees, highlights several areas of franchisee dissatisfaction, including franchisor support, system compliance, franchise fees and communication. Lack of transparency around business promises and likely profitability is also a sticking point, along with a perceived failure to engage franchisees in the decision-making process.

"[Franchisors] need to be more inclusive," Frazer says. "It's only when they're kept out in the dark that the franchisees will start to want to network with each other and air all the gripes instead of having the opportunity to be up-front."

The report's findings come as no surprise to ex-franchisees such as Deanne de Leeuw (Bakers Delight), Nicole Hoy (Allphones) and Kristine Patterson (SureSlim), who have been involved in protracted legal disputes with their former franchisors.

De Leeuw once operated three Bakers Delight stores on the NSW south coast before claiming unconscionable franchisor conduct forced her out of business. She has spent years fighting her case through avenues such as the NSW Industrial Relations Commission. In 2007, her case prompted federal MP Joanna Gash to raise allegations in federal parliament of fraudulent and intimidating conduct from Bakers Delight. Following investigations covering the de Leeuw case and others involving Bakers Delight franchisees, the Australian Competition and Consumer Commission cleared Bakers Delight of wrongdoing in 2008, and the franchisor argues it has been vindicated.

Undeterred, de Leeuw is still engaged in legal proceedings with Bakers Delight and is a vehement supporter of law changes and greater protections for franchisees through advocacy website bdlies.wordpress.com, one of a growing number of online forums venting franchisee anger.

"The big problem is that there's such an imbalance of power in the relationship [between franchisees and franchisors]," she says. "That transparency and trust, they're extremely important, and it's the franchisors that hold all of the information and if they don't want to share it then you have no way to get access to it."

De Leeuw acknowledges critics who say franchisees must do their homework before entering a system, but says: "You can't plan for the conduct you might be subjected to once you're in that contract." She also advises prospective franchisees to "question everything, verify everything" and get specialist legal advice on contracts.

Steve Wright, executive director of the Franchise Council of Australia, defends the sector and says at any given time disputation between franchisees and franchisors involves as little as 1 per cent to 2 per cent of franchising agreements.

"Our levels of litigation within the sector are much lower than the United States, for instance, which is the birthplace of franchising," he says.

Wright says rather than the Griffith University report pointing to disenchantment, the findings may actually reveal "a healthy situation".

"When you have any two-party business relationship there's always a healthy amount of cynicism between the parties about whose interests are paramount. Now, if it was 30 per cent who said, 'I totally disbelieve in my franchisor and believe that he or she is acting in his or her own interests alone at my expense', then I'd say we'd have a more worrying statistic, but I don't think it'd go that deep."

He also says "the proof is in the pudding" in that an estimated 98 per cent of franchisees who want to renew their contracts do so.

One practice some franchisees warn against is "churning", whereby at its most insidious a franchisor deliberately sets up a franchisee to fail. When the business folds, the franchisor reclaims the site for a song and resells it at the normal market rate or thereabouts. The more times the business sells, the more the franchisor makes.

While proving cases of churning can be difficult, other practices are easier to monitor. In April, the ACCC won a federal court battle against retail outlet Allphones on behalf of franchisees over claims of refusing to provide stock and pay commissions owed to some franchisees dating back to 2004. Fifty-five present and former Allphones franchisees are to receive payments totalling $3 million for the unconscionable conduct.

In a separate case, former franchisee Nicole Hoy is picking up the pieces from her experience operating an Allphones franchise in Eastlakes, NSW. In a case heard last year, the federal court found Allphones acted with "calculated dishonesty" and "continuing deceit" by withholding commission payments from Hoy Mobile, the business of Hoy and her former husband, Craig Hoy. The court ordered Allphones to pay about $75,000 to Hoy Mobile, but in a twist it deducted $32,000 from the payout for the simultaneous fraudulent activities of Craig Hoy relating to the sale of mobile phones. Nicole Hoy had been unaware of her partner's actions.

Now split from her husband, bankrupt and relying on a pension, she says franchisees involved in such bitter disputes ultimately have to get on with their lives. For her, that means focusing on her two children.

"I don't plan on raising them as a bitter and twisted woman," she says.

Hoy says her case and many others demonstrate the need for greater transparency in franchise systems.

"We are so under-protected," she says, adding that franchise agreements should be restructured to put franchisees on a par with company shareholders.

"We've invested in the business, but we don't get the transparency of shareholders. We don't get the comeback that shareholders have."

Patterson, who formerly operated a SureSlim weight-loss clinic in Hurstville, NSW, is abandoning a long legal battle with the franchisor over allegations including a flawed business model and misleading product claims.

"I just don't have the money to keep going," she says.

Patterson, de Leeuw and Hoy are highly critical of the ACCC and believe a specialist franchising ombudsman is required to oversee practices and resolve disputes.

"I think there needs to be an ombudsman who has the power and the right to fine franchisors," Patterson says. "At the moment there's no recall I think it would help."

At the Asia-Pacific Centre of Franchising Excellence, Frazer says disputes and mistrust between franchisees and franchisors serve as a warning for people entering a franchise system to conduct rigorous due diligence.

"[Some] franchisees are coming in all wide-eyed and excited about entering the franchise and really they're their own worst enemy in not checking it out properly."

http://www.theaustralian.com.au/business/small-business/cloaked-in-suspicion-franchises/story-e6frg9hf-1225871272513?from=public_rss


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