Deacons thoughts on franchise regulation
by
Norton Rose
This is presumably not the feedback that will warm the heart of the Hon. Fran Bailey Minister for Small Business, who has recently released the Government's response to the Review of the Disclosure Provision of the Franchising Code of Conduct.
Switzer's big picture solution – “to create a franchising ombudsman with the power to convene consumer claims-style tribunals, so the facts of a battle between franchisor and franchisee can be aired openly" – was never on the agenda for the current review. The Terms of Reference for the Matthews Committee were to review the current operation of the disclosure aspects of the Code. While the Review recommends improvements to the Code that will enhance disclosure and thus assist prospective franchisees making better informed decisions when entering into a franchise agreement the proposed amendments of course fall far short of the Switzer solution.
Disclosure – comprehensive prior disclosure – is the unifying factor in the franchise-specific regulation of the relatively small number of countries that specifically regulate their franchising sectors. While the review recommendations will improve the quality of prior disclosure information, prospective franchisees should not take too much comfort from the expected reforms. Regulation has an important and acknowledged role in protecting franchisee interests but no disclosure regime-indeed no regulation-can guarantee business success. The inevitable reality is business involves commercial risk and regulation cannot remove such risk.
Although the Australian franchise sector is characterised by disputation and failure rates that are admirably low measured against international benchmarks and in comparison with domestic independent small business operation, this of course provides no comfort to a failed franchisee.
Any initiatives that can be taken to reduce the possibility of failure are worthy of consideration. Improved prior disclosure is such an initiative and any additional compliance cost to franchisors is not an unreasonable price to pay if better informed prospective franchisees are able to make better decisions.
While regulation is central to a strategy to protect franchisees it is only part, albeit an integral part, of the solution. Regulation must be supported by three other pillars: education, due diligence and informed advice.
Education. For those involved in this endeavour it is continuously frustrating that the take up rate for education programs from prospective franchisees is regrettably low.
Due diligence. For prospective franchisees the importance of conscientious due diligence cannot be over emphasised. The comprehensive prior disclosure document is simply the starting point. Prospective franchisees must rigorously assess the business concept being franchised and the market in which it operates, as well as their own suitability to be a franchisee and in that particular system. Discussions with past and present franchisees are particularly important as are those with family, friends and mentors.
Specialist advice. The advice of legal accounting/financial advisors with experience in franchising comes at a cost which is nevertheless small in relation to the total investment being contemplated. Prospective franchisees are foolish if they exercise their "right" under the Code not to obtain the specialist advice they are advised to seek.
This article appears courtesy of Deacons .
See the running a franchise and buying a franchise page for additional information. 20.08.2007
FCA Member
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