No systemic problems with franchising

Business is risky. It’s a cliché but it is true, especially in market economies like Australia. There is no guarantee of success, and in a competitive market all aspects of a business model are constantly under pressure.

Consumers drive demand and success in small business relies on them spending; and if clients aren’t buying, there is no amount of regulation or legislation that will alter this self-evident truth. Failure is just one bad decision away; and if failure comes, it could mean the loss of everything.

So why do small business investors, who mitigate their business risk by joining an established brand, expect to have regulations and legislation introduced to protect them from market failure? Why does the National Franchisee Coalition (NFC) want greater law to protect them from market failure than already exists in the highly regulated franchise market?

The NFC speaks of rogue franchisors, of churning, of unscrupulous behaviour of franchisors, but where is the evidence? It is extraordinary the media and some politicians listen to the cries of a very loud unrepresentative few, and not look at the evidence within the market.

In any market there are unscrupulous people trying to take advantage, and this is the reason we have a regulated market, with the ACCC as its guardian.

But where is the evidence of the systemic failure of the franchise market? Where is the systemic unscrupulous behaviour of franchisors to warrant further regulation to protect franchisees from market failure? Where is the evidence of systemic churning? Where is the evidence of unfair dealing, especially when the Franchise Code is so prescriptive?

The ACCC has none, nor do the research universities, nor the Office of Mediation Advisor, or indeed, the various small business commissioners. Yet, a small unrepresentative body, with little market credibility, gains a policy ear with no reference to any examples, case studies or research.

The Australian franchise market is the most regulated in the world. It has a substantial Code requiring franchisors to provide full disclosure on an annual basis; it has government accredited education; tertiary institutions providing research and education; an active regulator and a system of mediation that leads other industries. Yet disgruntled former franchisees still want more.

The Code does not guarantee success for a franchise system; it does not stop a franchisee from over investing; it does not require a franchisee to disclose; it does not require a franchisee to follow the franchise system, the very essence of success; the Code does not guarantee a franchisee will get their money back if they fail.

The Code does require the franchisor to provide full disclosure annually; it does require the franchisee to seek advice and complete due diligence prior to signing a contract; it does require a franchisor to provide a list of current and previous franchisees, so a prospective franchisee can talk to them about their experiences; the Code provides adequate protection, as do the trade laws associated with any other Australian business.

Before denigrating the most success franchise regulatory scheme in the world, which is copied by many other nations, perhaps the NFC can point to examples of systemic market failure, case studies of churning and unfair practice; and perhaps, they can provide evidence of their members having done adequate education and due diligence prior to entering the franchise sector.

The sad fact is that many who enter the franchise market believe it to be an entrée to financial success. It can be, but it requires the franchisee to follow the system and work hard. Sadly, this is not the case with many who fail. Those that want a greater say in franchise operations should perhaps start their own brand as many franchisors have themselves done, rather than change and challenge those brands that have already done the hard yards of start-up and experienced the pain of growth.

We do not need more regulation in Australia. What we need is greater franchisee disclosure, more pre-entry education, and more access to the established mediation processes through ongoing education via government agencies and the established industry body.

Punish those that take advantage, but do not denigrate a world-leading franchise sector that has created a significantly fair market since the introduction of the Code in 1997.

Richard Evans is an award winning franchisee and author of the Australian Franchising Handbook.