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Franchises are all nonsense

Sarah Stowe

If I had constructed this provocative headline simply to grab the attention of the casual reader I would no doubt be accused of blatant sensationalism. Those who know me as a passionate advocate of franchising may be more concerned I was losing my marbles. Neither is the case.

Perhaps more worrying is that this intemperate and absurd statement was made by a member of the Economic and Finance Committee of the Parliament of South Australia which is conducting an inquiry into franchising.

Hansard for (17 October 2007) records Mr JR Rau MP as commenting that ñin a perfect world we would not have franchises at all because I think they are all nonsense.î

Mr Rau is clearly not a big fan of franchising. Three days earlier he opined that:

in my time I have had a look at a few franchise agreements, and from what I can work out it basically says to the franchisee, ñYou become the first level of risk bearer on behalf of the franchisor, so short of a catastrophic risk it will all be borne by you, not the franchisor. And as soon as your capacity to absorb the risk is exhausted, we will replace you with somebody else who will then absorb the risk on our behalf until such time that there are no fools left in the queue, at which time we may or may not have to put our hand in our own pocket. Secondly, you will guarantee our profits, because we will sell you stuff at the price that we determine and you will buy what we want you to buy, etc. You will guarantee our cash flow. And, thirdly, after you have done all of that, if you accidentally make a little bit of profit, we will give you a small share of it. ñWhy would any sane person sign up for that?î

The reality of course is that the scenario described by Mr Rau is not an accurate description of franchising as it is practised by the 1000 franchise systems in Australia. Franchising could not survive, let alone thrive as it indisputably has, in such circumstances.

It is not intended to trivialise or discount the pain of a failed franchisee to point out that a free enterprise system cannot guarantee business success. Entrepreneurship inevitably involves risk. AustraliaÍs regulatory framework goes further than any other country in seeking to remove risks to the franchisee arising from the imbalance of power and information inherent in the franchisor/franchisee relationship while leaving business risks for the parties themselves.

Franchisors who disregard their legal obligations deserve the appropriately harsh legal consequences and the franchisor lobby has no interest in supporting recalcitrant franchisors who damage not only franchisees but the reputation of the franchise sector.

Any initiatives that can be taken to reduce the possibility of failure that are consistent with the basic principles of a free enterprise economy are worthy of consideration by the South Australian Franchising Inquiry.

But, sadly, so many cases of franchise failure testify not to limitations of the law but to the franchisee not accessing education programs, not obtaining appropriate advice, not undertaking due diligence and not appreciating that the success of franchising does not necessarily translate to success within a particular franchise system at a particular location.

Prospective franchisees should take very seriously the caution spelt out on the first page of the mandatory disclosure document. Entering into a franchise agreement is a serious undertaking and is legally binding if you sign it.

One could respond in kind to Mr RauÍs opening gambit by suggesting that ñin a perfect world we would not have politicians at all because I think they are all nonsenseî. But I donÍt believe that of politicians and sincerely hope that Mr Rau does not believe that of franchises.

Andrew Terry

School of Business Law and Taxation, UNSW

Special Counsel, Deacons