How many do we have to have before we are sure of the state of play in the sector?
This is an obvious and understandable reaction to the news that we do in fact face another sector-wide inquiry - at the Federal level this time - to follow the recent state inquiries in WA & SA, and the Matthews Report of 2006/07.
So is this latest Parliamentary initiative 'Good news or bad?'
Easy to say 'bad', because this inquiry may turn out to be 'more of the same' as experienced in SA, where the tone was an aggressive attack on the franchising sector from go to wo. On the other hand, there is also an opportunity to identify those aspects of the WA and SA inquiries' findings with which we agree - such as the need for greater education, particularly for those about to start, and just starting out, in franchising.
It is a chance for us to set the record straight on a few key issues.
It is also an opportunity to correct some of the misconceptions created during the WA and SA inquiries and to reinforce the strong contribution of the $128 billion franchising sector to the national economy.
The SA inquiry is a worry because it made recommendations for retrospective changes to existing law which, if implemented, would destabilise the sector, create the prospect for opportunistic litigation and undermine investment.
As Franchise Council of Australia (FCA) chairman John O'Brien said recently at the New Zealand national conference, it could result in SA becoming a 'no-go' zone for franchise sector investment.
The FCA put strong and thorough submissions to the WA and SA inquiries, with the help of Deacons partner and former FCA chairman Stephen Giles and the FCAs legal committee. The new inquiry gives us the chance to put our responses to the findings of those inquiries into Federal Parliament, as well as WA and SA Governments.
So, how many more inquiries do we need? As the two State inquiries followed the comprehensive Matthews Report which concluded in 2007 (with subsequent changes to the Franchising Code of Conduct implemented only four months ago), there is sound reason to expect this latest inquiry can be the last for the foreseeable future.
Details of the Inquiry
The new inquiry is being conducted by a joint standing committee of the Federal Parliament, meaning it has MPs from the Senate and House of Representatives, but no franchising experts. The inquiry will be open to submissions until 12 September. It will then conduct hearings, probably in a number of capital cities, before delivering a report by 1 December.
The inquiry has very broad terms, meaning it can address virtually any franchising issue. It identifies two key areas:
- the adequacy of the Franchising Code to protect the interests of franchisees; and
- the possible inclusion of a'good faith negotiations' requirement relating to end-of-term arrangements.
The 'good faith negotiations' issue was raised in the WA and SA inquiries. The FCA has urged all Governments to approach this issue with extreme caution. The concepts of 'good faith negotiating' and its opposite, 'unconscionable conduct', are already understood and accepted across the entire small business sector. Indeed, they are specifically addressed in the Trade Practices Act and the FCA member standards.
There is a risk the addition of a non-specific 'good faith' element to the Franchising Code of Conduct could simply create an overlap and opportunity for legal argument about the meaning of the phrase. And what would this achieve? Over 97% of agreements are renewed at present, usually on similar terms to those which applied in the preceding agreement and without the need for a legal wrangle.
The issue of the ownership of goodwill has been tested in courts with the standing precedent that the goodwill resides in the business brand, not with the licensee.
Those who promote the idea of a 'good faith' clause to be added to the Code are seeking to unsettle the status quo in order to allow legal argument as to the possibility of goodwill, or some other similar entitlement, for franchisees at the end of term. This could have the effect of not only creating a legal argument where there is currently none, but also adding to the cost of concluding an agreement - a cost likely to be built into the entry price future agreements, making it more costly for franchisees to buy into a system.
No franchisee or business person of any kind would be likely to say ‘no’ to the opportunity of a end-of-agreement bonus, however, the franchisee representative on the FCA board, Tony Mellhem, has made it clear this is not a clear-cut benefit. They may not be so enthusiastic if they anticipate a costly legal argument as to entitlement (and the size of it) or if they were asked to pay up-front installments to cover a franchisor against the cost of an end-of-term payout.
The FCA will be presenting a submission to the inquiry and will make sure to keep you posted on our progress and that of the inquiry, as it develops.
Lastly, the 2008 National Franchise Convention is coming up fast. I urge all members - franchisors, franchisees and suppliers - to attend this fantastic franchising event. This year's program has something for everyone and will provide opportunities for education, networking and promotion of your brand, as well as a chance to catch up on the latest market trends and techniques.
by Steve Wright - FCA Executive Director
19-Nov-2008