Is franchising a risky business?

By Maria Robinson | 02 Jul 2019 View comments

I recently began an insurance review in our business and the results left me speechless!  The first part of my review was Professional Indemnity insurance. I spoke with a trusted insurance broker and he explained that many insurers have pulled out of the franchise sector.  Too risky, he said, too many concerning franchisor behaviours for insurers to take a punt on. I completed the relevant form and the broker said he’s put it out to insurers – he expected to get some quotes from 3-5 insurers.  The result? One insurer was interested but their proposal came with a “Franchisor Endorsement” which tables numerous detailed exclusions. 

Is franchising a risky business?

We are a franchisor who has been in business for five years, franchising for two years.  We are a low cost professional services franchise model with the absence of retail premises and associated fitout costs.  The CEO (me) has been in franchising for 15 years with extensive experience in legal, risk and governance matters. The risks seem minimal to me – but insurers believe otherwise simply because we are a franchise system.

Good governance, risk identification and risk mitigation are key in all businesses today but if your business is struggling to get PI insurance, good governance and risk are imperative in your business.  And the message is loud and clear – insurers, people in the business of risk, believe franchising is too risky to handle at the moment.

There’s been a shift in the air. Societal values are changing.  Government, regulators, courts, consumers, employees, franchisees, insurers – they are saying it’s time to do things differently.  They are calling for a higher level of consciousness, consideration and behaviour from the business community. The bare minimum legal requirement is no longer sufficient.  Not abiding by legal requirements is unacceptable. The ethical movement is gaining strength not only in Australia but globally.

Franchisors work hard, we take risks, we put our homes on the line, we have a belief in our business models, we pour our hearts and souls into our businesses, we develop relationships with franchisees, with suppliers, with clients – our business is our baby.  Our passion is unquestionable. But what of our governance?  

Ongoing investment in our businesses is a must today.  Staying stationary actually means you are going backwards – we have all heard that!  We not only need to invest in our business models on an ongoing basis but also our business frameworks and governance is a key framework.

What does good governance achieve?

Good governance is NOT about creating red tape and bureaucracy.  It is about having access to key information, it is about having policies and procedures in place, it is about monitoring of the business.  It enables better decisions in a more timely manner taking into consideration all stakeholders such as head office staff, franchisee, customers, shareholders, investors, board members, lenders and regulators.  

It means an insurer is more likely to take a punt on you.  If you can have a healthy balance of interests of each of these parties you will have good governance. 

What are the key principles for achieving good governance?

There are three key principles for achieving good governance:

  1. Transparency: there will always be some elements of the franchisor business and operations which are confidential however a culture of transparency will achieve a trust in your network.  Transparency is achieved through collaboration and participation by franchisees, striving for consensus when possible, being inclusive and treating all parties equally, being aware of the requirements of each stakeholder and proactively meeting those requirements (nothing good comes of ignoring a lenders covenants).
  2. Accountability: being responsive and taking responsibility for decisions, successes, omissions and failures is imperative for good governance.  Defensiveness, excuses, emotion and blame do not amount to accountability. To be able to embrace accountability it is essential to have monitoring and oversight.
  3. Security: to keep your business and its people secure and safe is a core component of good governance.  This can include everything from OHS to protection from cyber security and data protection, especially in the digital world we live in. This can be as simple as having a process where new debtors’ bank account details are verified verbally prior to payments being made to them.

What infrastructure is required for good governance?

This is where operations become ever so important.  To achieve good governance you need the following in place:

  • Values: you need to determine what you stand for and be true to this
  • Policies: this guides the standards and decision making elements for your head office staff, franchisees, stakeholders and suppliers
  • Systems: ensuring your systems facilitate operations is key, from a suitable Standard Operating Environment (SOE) to appropriate data capture and storage
  • Processes: Standard Operating Procedures results in the efficient and effective execution of operations underpinned by transparency and fairness
  • Reporting: many of you will have heard the saying “if you can’t measure it, you can’t manage it” and the extension of that “if you can’t measure it, you can’t improve it”.  I have always felt it is important to be “ACCC ready” should they ever decide to audit my franchise business. Reporting on franchisee financial performance, franchisee and franchisor HR compliance, sales reporting, franchisee breach management, compliance training etc.  These are all key to monitoring your business

The franchise sector is still strong in Australia.  Professionalising the sector through good governance will hold us in good stead as we head into a world of increasing complexity and higher standards.  I look forward to the day when I again receive quotes from numerous insurers.