Have franchisors killed franchising?
Unethical franchisors have led the franchising industry to the point it may no longer be a viable business model. The newly formed Australian Association of Franchisees (AAF),are calling for this conduct to stop and for new legal foundations to underpin the industry for the sake of the ethical franchisors and all franchisees.
The Parliamentary Joint Committee on Corporations and Financial Services (PJC) for the past eight months has held an Inquiry in to ‘The Operation Effectiveness of the Franchise Code of Conduct’ (the Inquiry). Hundreds of submissions and dozens of witnesses have testified that their businesses were destroyed by a massive power imbalance created by franchisors exploiting legal loopholes.
“Franchising, as a business model, is on life support and needs urgent changes for there to be any chance of survival”, said Matt Wheatley, President of the AAF. “The AAF is calling on the PJC to make recommendations that will modernise franchising regulation and provide the balanced obligations and shared responsibilities that business partnerships require to flourish.”
Peak franchisor bodies, whom have held themselves out claimed to speak for both franchisors and franchisees, have shown through the Inquiry they only care about franchisors. Their recommendations to the PJC argue, in effect, ‘nothing to see here, let’s move on’. The newly formed Australian Association of Franchisees is the successor to the Franchisee Federation of Australia (FFA)and intends to be the strong voice fighting solely for franchisees whom are all encouraged them to sign up (see www.franchiseesaustralia.com.au ).
“The AAF has been created to fight for the rights of all franchisees in response to the dereliction of care by franchisors and their peak bodies, said Wheatley. “Now franchisees will have someone in their corner to advocate for better protections under law, to stand with them against unethical franchisors and to provide professional advice.”
There is universal agreement that franchising is a significant sector, employing nearly half a million people and is a vital part of the Australian economy. There is also agreement that the vast majority of franchising systems are good businesses that work well for both franchisor and franchisee.However, the problem is that any one of these franchises, due to the absence of checks and balances in the Code of Conduct, are a pen stroke away from becoming another catastrophe like those the Parliamentary Inquiry has heard of in past weeks.
The FFA made a submission to the PJC outlining its recommendations on redressing the power imbalance in franchising. The AAF suggests that the Code is built on incorrect foundations and that franchising is not transactional which puts it under the Competition and Consumer Act. Franchising is in fact a form of investment that should, at least in part, be governed by the Corporations Act 2001 Cth.
“Franchising is clearly a form of capitalisation, that is, a business decides that in order to enable it to grow that, rather than raising equity or debt, it will expand by having others invest capital and effort,” said Wheatley. “That by any definition is a form of investment that should be afforded the same rights, obligations and protections as equity or debt capitalisation.”
“If the PJC is to go close to correcting the massive and unjust power imbalance then it must reconsider the foundations on which the industry is built, concluded Wheatley. “If we don’t fix this now, we will be back in this very same place again and again.”