Deacons on how to fend off franchise failure

According to Deacons , Irish dramatist, Brendan Behan, once said: “There’s no such thing as bad publicity except your own obituary”. For this comfort, the franchise sector should be grateful. It reflects the current maturity and growing significance of franchising as a matter of increasing media interest. However, over the past couple of months, the adage “there’s no such thing as bad publicity” has been sorely tested. A spate of negative media commentary has done little to inspire confidence in a sector, which the Prime Minister recently acknowledged has been “an integral part of the success story of the Australian economy over the last decade”.

The catalyst for the bad press has been a report, When The Franchisor Fails, prepared for CPA Australia by a University of New South Wales academic. The report makes a number of recommendations to improve a franchisee’s vulnerable position on the failure of the franchisor. These recommendations, as with other recommendations to improve the regulatory regime within which franchising operates in Australia, should be considered and assessed. Unfortunately, and predictably, it is the sensationalist grabs that have been picked up by the media.

The study, which aims to determine the effect of franchisor failure on franchisees, was based on survey responses by only 14 former franchisees – a response rate that is so low that the research is, in the author’s own words, “of limited significance”. Yet, it has been described as a “damning report”.

Franchisor failure is traumatic, costly and highly disruptive for any unfortunate franchisees within the system. However, in the main case study that examined the insolvency of Traveland, on the failure of its parent Ansett, two-thirds of the franchisees whose fate was known joined other franchised chains. This is not the outcome they contracted for, nor expected, when they originally joined the Traveland system, but it is far from a worst-case scenario.

The experience of the LJ Hooker franchisees on the failure of their franchisor, Hooker Corporation, was extremely positive. By sticking together as a group, they not only maintained the value of the system for the liquidator, but were able to extract significant concessions and revised contracts from the ultimate purchaser of the system. Two years later, LJ Hooker achieved national recognition as franchise system of the year.

The report refers to the “myth that franchisors do not fail” and “the notion [that franchising is an] infallible business model”. It would be unfortunate, and surprising, if prospective franchisees had this impression. Two decades ago, at the time that franchise regulation was first being debated, the Council of Small Business Organisations of Australia (COSBOA), argued the franchise case for reform. COSBOA claimed that, in the particular circumstances of franchising, there were elements quite different to normal business development because of control of the franchisor. COSBOA’s argument suggested “those special additional risks arising, in part, because of the balance of power in the franchising relationship should be minimised, while leaving the commercial risks and decisions to be handled by the practices concerned”.

COSBOA’s concerns were finally addressed in 1998 by the introduction of the Franchising Code of Conduct and the prohibition of unconscionable conduct which, with the existing prohibition of misleading conduct, provides the world’s most comprehensive and protective regulatory regime for franchisees. However, a regulatory regime can never remove all risk. Recent headlines perform a valuable role in counselling franchisees to exercise due diligence in relation to the franchisor, as well as the business concept, the business system and the financial investment.