The inconvenient truth about rogue franchisors

Advocates of state-based franchise regulation argue that current and potential franchisees must be protected from the rogue franchisors whose predatory behaviour is so bad that further legislation in addition to the Franchising Code of Conduct is required.

While acknowledging that good franchisors exist, the advocates of state-based legislation for franchising in both South Australia and Western Australia insist that the rogues are responsible for the systemic abuse of franchisees around the country.

According to these advocates, this systemic abuse includes a range of behaviours designed to fleece franchisees of their wealth and well-being.

But there is an inconvenient truth behind this rhetoric and the claims of widespread and systemic abuse of franchisees: There are no reliable statistics to back-up these claims.

Granted, there is qualitative evidence that not everybody who goes into franchising as a franchisee (or a franchisor for that matter) has found a pot of gold at the end of their franchise rainbow.

Such qualitative evidence exists in some of the submissions made to the 2008 franchising inquires in South Australia, Western Australia and at a federal level, including the consequences of business failure on individuals and families.

There can be no denying the financially tragic outcomes of a failed business in these instances, particularly among former retail business owners who continue to be liable for shop rents on premises where they can no longer afford to trade.

Yet the risk of these same unfortunate outcomes also exists among non-franchised businesses as well, and there is a fundamental lack of research to indicate the comparative failure rates of franchised versus non-franchised small businesses.

Without sound research to compare relative rates of failure, how is it possible to conclude that there are systemic problems in franchising that warrant further regulation beyond the national framework that has already been in place since 1998 when the Franchising Code of Conduct was first introduced?

What quantitative proof exists that across the entire Australian small business landscape, a franchised small business is at greater risk of failure than an independent small business?

According to the latest Franchising Australia survey by Griffith University, which is widely recognised as the only authoritative source of statistical data on franchising in the nation, the franchise sector in Australia currently has 1,025 franchisors, some 78,000 outlets and an annual turnover of $128 billion.

Of the 78,000 outlets, around 8,000 of these are believed to be owned by the franchisors themselves, leaving up to 70,000 outlets owned and operated by franchisees (including fuel retailers and motor vehicle dealerships).

Given a growing trend toward multiple unit, franchising with the survey showing most franchisors having on average three franchisees who owned at least two outlets each, it is likely that the total population of franchisees will be less than the 70,000 outlets in operation.

But the claims of systemic abuse within the franchise sector have been fuelled by the number of submissions received by the SA, WA and federal franchising inquiries in 2008 as follows:

Western Australia: 90
South Australia: 46
Federal Inquiry: 168
Total for all inquiries: 304

Submissions to the various inquiries were made by franchisees, franchisors, private individuals, academics, business groups, governments and others.

Because of the separate nature of each inquiry, submissions were made to all three by a number of individuals or organisations (including the Franchise Advisory Centre), meaning that of the total 304 submissions received across all three inquiries, not all were from individual sources, and of these, not all were from or on behalf of disaffected franchisees.

Assuming for a moment that all 304 submissions were lodged by individual disaffected franchisees, this would make at most 0.43% of a maximum total national population of 70,000 franchisees or less than half a percent.

Even if claims by South Australian MP Tony Piccolo (an advocate of state-based franchise legislation who has already tabled a proposed bill for SA) that he gets an email or letter from a disaffected franchisee at least once per week are taken into account, this would make for a total of 408 disaffected franchisees (304 from the three inquiries, and 104 from two years of 52 weeks each since the inquiries closed).

Allowing for the extra disaffected franchisees since the inquiries, this still brings the total to only 0.58% of the total maximum population of franchisees in Australia.

In other words, the advocates of further franchise regulation who propose specific state-based legislation seek to mandate changes that may or may not advantage less than one percent of the franchisee population, while at the same time risking severe unintended consequences for the other 99%.

Of course, the mathematical analysis that has gone into creating the percentages above relies on some very wobbly assumptions, but this is exactly the point made right at the beginning of the article and the inconvenient truth behind the rhetoric about rogue franchisors: There are no reliable statistics to back-up claims of systemic failure in franchising.

No government should rush to legislate anything without first ensuring that the statistical evidence exists to support the proposed legislation, and that the proposed legislation will have no consequences other than to address the issues identified. In regards to the proposals by SA and WA to legislate franchising, this statistical evidence is disturbingly absent.

Furthermore the proposed legislation currently tabled in WA, and that formerly tabled in SA, would entail substantial and widespread unintended consequences that would add to the risk and cost of business for franchisors, which in turn would be passed on to franchisees, and which in turn would be passed on to consumers.

It is little wonder then that the new federal Small Business Minister Nick Sherry is at odds with WA and SA over the need for further regulation at state level when a national framework already exists and has itself only recently been amended to further improve protections for franchisees.

Without reliable statistical evidence, claims that franchising is fraught with systemic failure are entirely subjective, and that is the inconvenient truth overlooked in the rhetoric and publicity around calls for state-based legislation.

Jason Gehrke is the director of the Franchise Advisory Centre and has been involved in franchising for nearly 20 years at franchisee, franchisor and advisor level.

He advises both potential and existing franchisors and franchisees, and conducts franchise education programs throughout Australia, and publishes Franchise News & Events, a fortnightly email news bulletin on franchising issues and trends.