What potential franchisees need to know about the franchise inquiry report

By Sarah Stowe | 18 Mar 2019 View comments

Franchise standards have to rise and franchising should provide better protections and rights for franchisees. That’s the conclusion of the franchise inquiry report from the Senate committee looking into the franchise sector.

The report acknowledged many franchisors have developed franchise systems which work to benefit both franchisor and franchisees and some operate in a very collaborative manner.

It also recognised the diversity of the franchise sector.

However it highlighted poor corporate governance at some franchises, and was sceptical of the role of shareholders in a franchise system.

The report was highly critical of the Retail Food Group, devoting a chapter to a case study on the multi-brand franchisor.

Franchise inquiry report: what franchisees need to know

The committee findings set out to achieve Fairness in Franchising, the title of the report. Overall the report outlined need to improve standards because “on the balance of evidence given to the committee in public and in confidence, far too many franchisors are abusing the power imbalance between themselves and their franchisees”.

The report aims to offer ways to rectify this imbalance.

It wants franchisors to be more accountable for how they use marketing funds, and to divulge details of supplier rebates.

It wants to improve financial disclosure so that franchise buyers have guaranteed access to relevant financial figures when buying an existing business – provided either by a franchisor or the vendor franchisee.

There are suggestions on ways to deliver more information to franchise buyers as they research possible investments. In particular, a greater emphasis on the risks and responsibilities of taking on a retail lease.

The report also looked at wage theft in franchising and ways to reduce the incentives for engaging in underpayments.

Empowering the ACCC

The committee wants the Australian Competition and Consumer Commission (ACCC) to establish a FranchiseSmart website for franchises similar to the MoneySmart service operated by the Australian Securities and Investments Commission (ASIC).

It also believes the ACCC should have more powers. The body which regulates the Franchising Code of Conduct should be able to stop franchisors who repeatedly market and sell a non-viable franchise from doing so. There should also be harsher penalties for misconduct.

And the committee wants franchisees to form a national association that can provide an alternative viewpoint to the franchisor-dominant Franchise Council of Australia (FCA).

A register of franchises in Australia could also be useful the committee suggests.

The FCA has supported the main goal of the report and is backing national registers and greater disclosure. However there are details on which it disagrees with the findings, or believes the issues to be more complex than indicated by the committee.

One omission that has surprised a number of franchise experts and the FCA is not making financial and legal advice mandatory for franchise buyers.

Franchising Taskforce

One of the report’s main proposals is for the government to set up a Franchising Taskforce. This body will include representatives from a number of different agencies such as the Department of Jobs and the ACCC.

It’s role would be to evaluate and implement the committee’s proposals.

So the report is the beginning of a process of change. But the upcoming federal election is likely to delay any implementation.

You’ll get a good idea of the main points in the executive summary or you can read the report in full: click here.