Franchisors hit back at SA inquiry report

Franchisors and their advisers have reacted angrily to the recommendations from a South Australian parliamentary inquiry into the sector, claiming that no amount of disclosure will guarantee a franchise won’t fail.

The South Australian inquiry recommended improving disclosure regulations, dispute resolution and unconscionable conduct laws to protect franchisees from bullying and intimidation.

Deb Shugg, the chief executive of bookkeeping franchisor Award Group, says that while the entire industry was appalled by franchisee stories of unethical behaviour by franchisors, prospective franchisees need to exercise caution when entering any business venture, whether it is a franchise or not.

“Franchisees who believe that buying a franchise will indemnify them from the possibility of failure are seriously misled. So too are franchisees who base their decision to enter into a franchise agreement on emotional reasons, like their love for the product, brand or concept,” Shugg says.

“Nothing, not even greater disclosure, will protect a franchisee who joins a franchise for emotional reasons or who is unable to manage the daily pressures and challenges faced by all business owners.”

Adrian McFedries, managing director of franchising advisers DC Strategy, says regulators need to be careful about over-reacting to small number of rouge franchisors. “The sector already possesses a level of regulation that is second to none, and imposing more half-baked knee-jerk regulatory reactions to a few instances of bad practice is not healthy for the sector.”

Like Sugg, McFedries says franchisees need to take responsibility for their own decisions. “Personal responsibility is seemingly a dying species in Australia, and one can only shudder at the thought of a recommendation for a franchisor to identify the risks of failure. It is an absurd recommendation and classic theory is any business has risk and the existing requirement to seek independent advice reinforces the need for a non-emotional role within the franchise transaction.”

He is concerned that over-regulation may crush the sector. “The results of this inquiry pose a very real risk of franchising being restrained or held back in Australia, which has serious economic consequences. Too often it is forgotten that the alternative model of SME independent businesses has a 90%-plus failure rate in the first 18 months, significantly greater than franchising.”