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11th November, 2019

What’s going on with franchise businesses in Australia?

Franchise groups have copped a blast from the media and regulatory watchdogs in the past couple of years. Here’s how to protect yourself if you operate a franchise, or are considering buying one.

It might be one of the fastest growing industry sectors in Australia, but franchises have come under intense scrutiny in the past couple of years.

It’s a big change for the books. Franchises are all around us, in every conceivable industry sector – from fast food brands to home improvement businesses.

According to a survey by FranchiseED, there are 1,120 franchise brands operating in Australia, accounting for four percent of all small businesses. It is estimated that they contribute approximately nine percent of gross domestic product (GDP),

The business format might offer franchise partners the opportunity to run their own business under a well-known brand name, but a senate committee has found that franchising needs a dramatic and immediate regulatory overhaul.

READ: Building or buying a franchise business? Start here first

The Parliamentary report points out that the franchise model exhibits a substantial disparity between franchisors and franchisees.

This report also identified systematic exploitation of some franchisees by a subset of franchisors and a regulatory framework that doesn’t provide adequate protection against such practices. It calls for new laws, greater enforcement powers and penalties for the regulator and a range of changes to the franchising code.

One of the key players among the most embattled franchise groups is Retail Food Group (RFG). The franchisor recently announced close to $100 million of losses and substantial store closures and significant restructuring costs but promises to rise from the ashes.

RFG operates household brand names such as Brumby’s Bakery, Pizza Capers, Donut King, Michel’s Patisserie and Gloria Jeans.

Media stories of the numerous issues with the franchises prompted a flurry of similar disputes and questions from other franchise operators in a bid to know where they stand and how they can protect themselves.

 


Disputes on the rise


Franchisees or those considering buying into a franchise need to remember that Australian Competition and Consumer Commission (ACCC) laws are under scrutiny. And regardless what happens, laws can’t ensure the success of the business or that your investment is a wise one. The fact is that a franchise can fail, just like other business.

Franchise disputes are increasingly common, according to Peter McKnight of Franchise Accounting and Tax.

Making sure your accountant is closely involved in the day-to-day running of your business is crucial, he says.

The main reason is that expectations have not been met. Whether that’s due to unrealistic expectations in the first place, commitments not fulfilled or items not delivered as promised or set up and fit-out costs far exceed the original budget.

“This causes additional financial stress for the franchisees and adds pressure all round,” said McKnight.


Do your homework


It’s important to do your own checks to decide whether a franchise is a good deal. While it’s against the law for a franchisor to give you false or misleading information, there’s no legal protection for someone who doesn’t do independent checking or signs up to a bad deal, the ACCC points out.

The Australian Small Business and Family Enterprise Ombudsman Kate Carnell has also urged prospective franchisees to do their homework before investing. Her office received more than 50 complaints in the June quarter from franchisees in strife, highlighting the need for greater awareness in this space.

“It’s vitally important that potential franchisees know what they’re getting into before signing off on a franchise agreement,” said Carnell.

“The cost of setting up a food service franchise can run into the several hundreds of thousands of dollars, so it makes good business sense to seek independent legal and business advice before making that significant investment.”


Avoiding issues


Robert Bryden is the founder of Robert Bryden Lawyers, operating in the business dispute resolution service.

“People new to the business, investing their life savings or a redundancy to buy a franchise are often driven by their heart, not their head.

“As a business advisor, learn to recognise the signs and put on the ‘black hat’ where needed to settle them down about the pitfalls and risks,” said Bryden.

Some of the steps that franchisees can take to avoid franchise disputes include:

  • Look out for ‘churn-and-burn’ operators
  • Be wary of a franchisee positioning a franchise as a purchase from an existing franchisor
  • Seek expert advice from a franchise lawyer
  • Be suspicious of financial projections
  • Compare financial projections provided with actual figures from several other franchises in a similar demographic area
  • Keep notes of conversations so if things blow up, you’ve got proof of what you’ve agreed to

The ACCC website points out the risks here.

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