Applying the Franchising Code of Conduct is today’s market

There can be no doubt as to the success of franchising as a business method, or of its importance to the economy. It accounts for approximately 10 per cent of Australia’s gross domestic product, with 60,000 franchisees running an $80 billion industry that employs more than 600,000 Australians.

As Graeme Samuels, Chairman of the Australian Competition and Consumer Commission (ACCC) states: “The fact is franchising remains a highly successful way for thousands of Australians to realise the dream of owning their own small business and the code of conduct has gone a long way to ensuring the success of many of those aspiring self-employers”

Yet despite this, the Code does not require a franchisor to provide any earnings information in respect to an existing or future franchise location or opportunity. It merely requires the franchisor (if they choose not to provide earnings information) to make a statement in the disclosure document that such information is not given, earnings may vary between franchises, and that the franchisor cannot estimate earnings for a particular franchise.

Out of pocket, out of patience

The Code was introduced in 1998 to regulate franchising in Australia and to provide protection against some less than scrupulous activities that were occurring in the industry at the time.

The Federal Minister for Small Business and Tourism, Fran Bailey, is overseeing a review of Part 2 (Disclosure) of the Code. Her office has advised that around 70 ‘strong’ submissions have been received from franchisors, franchisees, and interested third parties. The Minister’s review committee has had its 30 September deadline, to report its findings back to the government, extended to 31 October – largely, a spokesperson for the Minister said, because of the volume and strength of the submissions.

The harrowing side of homework

The ACCC’s Samuels argues that “the Code of Conduct and the Trade Practices Act are both robust and effective, but the best legislation in the world can’t protect the unprepared from their own mistakes”. And, of course, he is right – to the extent that there will always be buyers that fail to do enough homework.

Establishing proper projections

A strong argument can be levied for greater ‘earnings’ information disclosure than the Code currently requires. Annexure 1, 19.5 requires that if earnings information which is a projection or forecast is given, it must include (among other things) “the facts and assumptions on which the projection or forecast is based”, and “the extent of enquiries and research undertaken by the franchisor and any other compiler of the projection or forecast”.

Would a franchisor or pending franchisor plan to open a location that was not supported by sound research and – if an established brand – relevant historic information? If the answer is ‘yes’, they should not be in business. But currently, by not requiring earnings information to be given, the Code allows them to do exactly that. If the answer is ‘no’, then why should that information not be given to a buyer, subject to sufficient protection being afforded the franchisor in the provision of that information?

Access the Franchise Council of Australia is a not for profit membership organisation that is the peak body representing the franchising sector in Australia.