FRANCHISEES FIND VOICE

If his name is familiar, it is probably because David Beddall was a Minister in the Hawke and Keating governments between 1990 and 1996, holding the portfolios of Minister for Small Business, Constructions and Customs, Minister for Communications, and Minister for Resources.

However, after 16 years in Federal Parliament Beddall retired from the political arena in 1998 to return to private business.

He has a long association with the small business sector, having chaired the House of Representatives Inquiry into Small Business in 1989 and, as minister, being instrumental in the introduction of the first reforms in the franchising sector and the establishment of the Australian Franchising Advisory Council.

Beddall now operates his own consulting business and is a chairman or director of various public companies. He is also president of the Australian Franchisees Association.

“The agenda of the association, which has been established for just over a year now, is twofold: to represent franchisees in their disputes with franchisors, and secondly – and just as importantly – to be a voice for franchisees in government,” he explains.

“When done well, franchising – which I have always been committed to – is an excellent methodology for people to enter the business world. There are strengths for both parties – on the one hand, companies that wish to grow their business but are capital starved can expand through franchisees and, of course, there are opportunities for potential franchisees to buy a proven business model.”

Over recent months the AFA has been prominent in the daily press in the context of some fairly high-profile franchisee–franchisor disputes. Beddall, however, is keen to keep the issue in perspective.

“If everything in a system is going well, disputes tend only to arise when there is a change of ownership at the master franchisee or franchisor level,” he says. “We have had a couple of instances where systems have been operating successfully for over 20 years but, with a change in ownership, disputes have arisen with the new franchisor. Then, of course, there are always some people on the fringes of franchising who, in effect, are not really franchisors at all. That is when churning arises, because the business model is based on the constant acquisition of new franchisees. This is not necessarily widespread, but it is sufficiently prevalent to be of concern. When disputes do occur between franchisees and franchisors, we see our role as being to act as an intermediary. We have been doing that now for over 12 months – sometimes successfully and sometimes not.

“We have established a good relationship with the Australian Competition and Consumer Commission and with John Martin (ACCC Commissioner) in particular, and we intend to build that relationship. As I said, the role of the AFA is twofold: to represent franchisees in dispute but also to put the point of view of franchisees to government when there needs to be changes to legislation. In fact, we are currently working on what we call a ‘Fair Franchising Code’.”

Implicit in this is that the AFA has identified some areas that warrant reform in what, since 1998, has been the key foundation for franchising in Australia, the Franchising Code of Conduct.

“We believe it is time for a review,” Beddall confirms. “It is a long time since it has been thoroughly reviewed. There has been picking at the edges, but we think the time has now come for a thorough overhaul, where all parties come together to make the Code better.

“In particular, the disclosure provisions need to be enhanced and there perhaps should also be a more rigid adherence to franchisee training issues. Many disputes are territory related. For example, somebody will buy a franchise and expect to be able to operate exclusively in a certain area, only to find that the franchisor is either setting up a company store or selling other franchises. As such, we would like to see a greater level of disclosure before the franchise is entered into.”

There is, of course, such a thing as due diligence, and Beddall acknowledges that aspiring franchisees too frequently enter into agreements having conducted less than thorough research, only then to have their expectations dashed.

“Sometimes franchisees don’t understand what they are getting into,” he concedes. “There are, unfortunately, still people who see franchising as a way of buying a job. When the government and corporations were downsizing, many levels of middle management would use their payouts to buy into a franchise. This is not as widespread now, as most of the downsizing is done. In fact, many government departments and companies have become almost anorexic.

“Regardless, I think there is a general misunderstanding among a lot of franchisees about the relationship, and that leads to disputes. It is why we are saying there needs to be a lot more information available at the start, and towards this we are developing a training kit and checklist so that those who want to enter franchising can readily identify the key issues. For example, a lot of people do not amortise, but because a franchise agreement is for a set period of time it is important to amortise the cost, and that is part of the process of due diligence. Unfortunately, I don’t think many people do that – they think there is a perpetual right to operate the franchise, which is simply not the case. As such, one of our major roles is education.”

According to the Franchising Australia 2004 study, the number of franchises in Australia has grown exponentially over the past two years. However, as reported in the November/December 2004 issue of Franchising, the study’s architect, Associate Professor Lorelle Frazer, has expressed concern over the number of very small franchise systems that have emerged. As Frazer commented: “You are not going to go anywhere if you do not reach critical mass.”

Beddall agrees that this can, indeed, be a problem.

“In the US, similar associations to us warn people not to enter franchises that do not have 100 franchises,” he says. “In a market the size of Australia, of course, that figure does not apply. Still, franchising should not be used to grow a business that is not sustainable in its own right. If the existing business is not profitable, it should not be franchised. Quite often when people are overly cash-strapped they will attempt to use franchising to gain capital, but the model won’t work.

“Having said that, franchising is a legitimate and very good way to expand a business. The requisite is that it be a proven model. With regard to full disclosure and transparency, some of the big overseas systems are a benchmark. Potential franchisees are not only provided with figures on what they should earn, but comparative figures about other franchises that can be checked. It is important for people to have a realistic expectation of what their return will be, and that is one of the current failings of the sector – a lot of it is through rose-coloured glasses.”

Is there, then, much that Australian operators can still learn from overseas when it comes to the optimum management of a franchise system?

“There are many things we can learn but there is also a general view that there is much we can teach other people,” says Beddall. “When I was Minister for Small Business all the major franchises quite openly acknowledged that Australians were the best franchisees in the world. By and large they were able to adapt to a system as well as anyone in the US or elsewhere. We are good at franchising, and that is why there is so much strength in the sector. Certainly the Americans consider their Australian franchises to be among the best in the world.”

From a franchisee perspective, Beddall cites McDonald’s as not only one of the biggest, but one of the best systems.

“A McDonald’s franchisee has to put in a large amount of their own capital and work at their own expense for a long period to learn the business. It is imperative that training be more than just spending a couple of weeks with another franchisee. A thorough and properly developed training module is vital, and that is something the AFA hopes to develop with the assistance of a grant scheme from the Commonwealth Government,” he reveals.

“To put this into context, you need to understand that if you are buying a franchise you are buying a right to operate someone else’s business. It is not completely your own and therefore you have to be cognisant of the fact that the franchise operates in a particular way. This suits some people, but not others, and I do not believe it is totally understood in the sense that a lot of people think they are going to be their own boss, when in franchising you are responsible to the franchisor to operate the business on the terms that they define.”

Further to this, he emphasises that potential franchisees need to make sure that the business they are considering buying is suited to their skill set.

“Just because you are a successful manager in an engineering business doesn’t mean you can run an ice cream parlour,” he warns. “It is about making sure you understand what the business is and making a considered decision about whether that business is right for you.

“By the same token, there is also a responsibility on franchisors to ensure that they recruit the right people into the franchise. Once again, McDonald’s does this well. From the outset the company makes absolutely sure that people are right for its business. When people are not suited to a particular franchise, disputes happen.”

A key mechanism for resolving franchisee–franchisor disputes, whatever their cause, is something Beddall believes needs a substantial overhaul.

“The current mediation system doesn’t work,” he says. “When franchisees get into a dispute with their franchisor the mediation system is too loaded on the side of the franchisor, and by the time someone has reached that point they are usually financially stressed. Inevitably, it then becomes very litigious.

“Another weakness in the mediation system is that when there are a number of franchisees in dispute with one franchisor, each is mediated separately. This is something we would like to change. When there are a number of franchisees in dispute, there should be a mediation system in place that allows them to collectively mediate with the franchisor. This might happen in some individual franchises, but it is not mandated. Disputes can escalate with a ‘divide and conquer’ attitude, but I would always stress that this is the case with a minority of franchisors.

“Even the ACCC has acknowledged that it went through a very quiet period with few complaints directed towards it, but in the past 12 to 24 months this has escalated quite considerably.”

According to Beddall, the potential role of mediation is not properly appreciated across the board.

“It works well if there is a dispute that can be resolved quite readily, and we have acted for some franchisees in situations where the franchisor has been prepared to listen, make changes, and quickly resolve a dispute. But quite often we find it difficult at the outset when representing our members, because the franchisor tends not to want to talk to a third party. This usually breaks down over time, but it is initially a quite difficult issue, because franchisees who are in dispute – and particularly if there is financial strain on them – do not normally have the resources to fight a Supreme or Federal Court battle. Some people say these are business-to-business relationships, but in a franchise there is still something of the old master–servant relationship,” he maintains.

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