The Inquiry is over. What franchisors do now…

The report is in and there is no shortage of recommendations but what can franchisors do now? Melissa Strain, senior associate and Bruce McFarlane, managing director, BlueRock Law have some suggestions.

Although many say the report has caused reputational damage to the industry, it also presents an opportunity for franchisors to adapt in light of some of the more practical recommendations and implement some simple changes to ensure best practice and continued growth.

The committee found that, despite multiple amendments to the Code over the last 10 years, things are getting worse for franchisees. However, although the committee heard evidence of widespread misconduct on the part of franchisors, it also acknowledged that many franchise systems are working for the benefit of all parties.

The report included 71 recommendations designed to lift standards and conduct across the entire industry. Many of the recommendations are suggestions only and require further consideration by a Franchising Taskforce that has been established on the back of the inquiry.

What franchisors do now

  1. Review current documents and procedures

Recommendations:

  • applying civil penalties to a breach of every clause of the Code; and
  • the establishment of a public franchise register.

Suggestion: review current franchise documents and procedures for signing up franchisees to ensure compliance with the current requirements of the Code with a focus on timing, disclosure and franchisee advice.

  1. Unfair contract term review

Recommendation: Franchising Taskforce to examine appropriateness of making unfair contract terms in franchise agreements illegal and for civil penalties to apply

Suggestion: Unfair contract term review of current Franchise Agreement and any related documents with a focus on termination rights, unilateral variations, fines for breach and broad releases and indemnities in favour of the franchisor.

  1. Churning and burning

Recommendation: ACCC be given an intervention power to identify and act on the marketing and sale of franchises where franchisor has a track record of churning and burning.

Suggestion: Franchisors need to ensure, as far as possible, that their system is financially viable for both the franchisor and franchisees. This should be assessed prior to the establishment of a franchise system and regularly throughout its operation.

  1. Disclosure of financial information

Recommendation: extensive additional disclosure of financial information to incoming franchisees (2 years’ BAS) (info re comparable site for greenfield sites)

Suggestions:

  • take an active role in the sale of existing franchises;
  • require franchisees to use accounting and reporting software that gives franchisor access to this information so that it can be verified; and
  • consider developing pro forma disclosure re financial information to be used across the network.

      5.  Marketing fund

Recommendation: calls for greater transparency and accountability and increased reporting (from annual to quarterly reports).

Suggestions:

  • review current marketing procedures and accounting software and put systems in place to ensure regular reporting is achievable; and
  • ensure information contained in reports is meaningful and easily interpreted by franchisees.
  1. Dispute resolution

Recommendations: introduction of mandatory arbitration if mediation unsuccessful and empowering franchisees to initiate collective mediation

Suggestions:

  • encourage open communication within the network through regular conferences and contact with franchisees;
  • listen to, and attempt to address, concerns of franchisees; and
  • ensure genuine efforts are made to resolve disputes raised within the network.
  1.  Franchisee return generally

There was a big focus in the report on cost of goods and franchisees not making money.

Franchisors should prepare cash flow projections from the franchisee’s point of view to determine if franchisees can be profitable in the current market.

Will franchisees get a return on their investment? If not, how does the system need to be changed to make sure they do?

Get up to date information from franchisees and analyse that data to see if changes need to be made to the system (eg supply arrangements) to make sure everyone is profitable.

  1.  Rebates and supply arrangements

Recommendations: greater transparency regarding supply arrangements and rebates

Suggestions:

  • regularly assess supply arrangements looking at both quality and cost of goods; and
  • make sure franchisees can’t get the same product of equal quality at a better price (taking in to account factors such as consistency across network etc).

Improving the sector

The general aim of the recommendations is to develop greater:

  1. Transparency and accountability;
  2. Fairness and protection; and
  3. Education and awareness.

Although the recommendations are just that at this stage, franchisors can act now to ensure their systems are in the best possible position to, not only deal with any changes that are eventually adopted but, remain competitive in the market and experience continued growth and profitability.

Authors: Melissa Strain, senior associate and Bruce McFarlane, managing director, BlueRock Law.