Leading franchisors in the Australian franchise sector are moving on from the emotion and uncertainty of the last couple of years. After a sustained media campaign and a protracted Senate Inquiry now is the time for more of the sector to raise franchise reputations.
While there is still a group dwelling in the past (blaming the media, other franchise groups and lenders), the entrepreneurial spirit and commitment to higher standards is driving the actions of an increasing number of franchise systems.
11 tips on how you can raise your franchise reputation
One month after the report was handed down we see quality franchise systems focusing on the following seven key areas or principles:-
- Acceptance;
- Franchisee engagement;
- Transparency and differentiation;
- Relevance;
- Recruitment;
- Franchise documentation; and
- Compliance
Acceptance
Progressive franchisors are accepting the report for what it is – a series of recommendations aimed at improving the effectiveness of the Franchising Code of Conduct, and Australian franchising more broadly. Whilst many may legitimately question the approach or the workability of all recommendations they accept significant reputational damage has occurred. They accept there is a need to strengthen confidence in the franchise model and enhance their own ability to defend further attacks.
These same franchisors are paying less attention to the media and more attention to what improvement they could or need to make in their own systems, regardless of whether the recommendations become law.
Interestingly our anecdotal information shows the vast majority of existing franchisees have little or no interest in the report, as they see it as irrelevant to their situation.
Franchisee engagement
High performing franchise systems rarely lose sight of the importance of franchisee engagement. Regular measurement (preferably independent and external), formal consultation in relation to proposed or necessary changes and active coaching to optimise business performance have always played a key role but are enjoying a heightened focus.
TIP 1: Silence is not golden in franchise networks. Effective measuring and monitoring of engagement is one of the strongest lead indicators available to shape strategic initiatives. Professional external measurement and workshop facilitation generally promotes the most honest and constructive feedback.
Transparency and differentiation
The inquiry singled out specific franchise brands in its report, but also noted a general lack of transparency concerning disclosed information, with particular criticism around supply chain arrangements. Many brands are looking for ways to promote their transparency not just with supply chain arrangements but also with a renewed focus on marketing fund reporting and general documentation.
They also appreciate that differentiation is key in a time of increased media scrutiny. Franchisors do not want to be tarred with problems which are specific to other franchise systems. If franchises fail to show transparency and do not publicly differentiate themselves they will be seen as part of the problem, not an exception.
TIP 2: Actively promote your own legal compliance and transparency principles, as otherwise you run the risk of being seen as part of any problem that is raised.
TIP 3: Revisit supply chain arrangements and directly address franchisee concerns or cynicism. In many cases franchisees are not aware of the indirect benefits they receive as part of these arrangements.
TIP 4: Revisit marketing fund reporting and utilization disciplines. These remain a source of significant distrust and cynicism within franchisee networks with some concerns as to the lack of compliance from the previous code revisions. Franchise systems can minimize reputational risk and liability by ensuring full compliance.
Transparency and differentiation will become an industry theme, with the Franchise Council of Australia already flagging new mandatory FCA Member Standards that will require as a condition of FCA membership that all franchisor members lodge their Disclosure Documents with a searchable public registry from I July, 2019.
The trend of increased transparency is not confined to the Australian franchise sector. In the US, where FRANdata adds the Disclosure Documents of more than 3,000 active franchise brands per annum, we have seen financial disclosure jump from 47% to 67% in just three years. In a key learning for Australia this has been industry rather than regulatory led.
The Inquiry has recommended a public registry where documents could be searched. Franchise systems may prefer to show their commitment to transparency and a level of baseline compliance by filing their current documents with the established Australian Franchise Registry™ operated by FRANdata. This industry led initiative may prevent the additional cost, impost and loss of public control over disclosure documents.
TIP 5: Register your brand. Play your part in not only establishing your brand’s commitment to transparency but also contributing to an industry led initiative.
Relevance
Franchise systems typically operate in highly competitive markets. Franchisors need to invest a lot of time identifying their performance relative to their industry and the broader small business economy. At times this will require a fine tuning of strategy and at other times it will require bold and swift remedial action. This has the best chance of success with a fully informed and engaged franchisee population. A key ingredient to support such strategies is the possession of fact based data. This is available in various forms from various places including FRANdata, which has now accumulated an information base that covers 30,000 of the reported 80,000 units operating in Australia.
TIP 6: Base your strategic decisions and franchisee consultation on fact based information about Australian franchising and global trends.
Recruitment
There is no more important ingredient to the success of the franchise model than effective recruitment. In recent years, against a backdrop of adverse media coverage and a sector lacking the data to defend itself, the challenge has become a problem for many brands.
We see the key to successful recruitment as a brand’s ability to differentiate itself in what is now a very confused market.
Specifically, how does a prospective franchisee tell the difference between a high performing brand and one in decline?
- Transparency. Up to date documentation, access to existing franchisees, better information around average unit performance.
- An independent external rating that allows a consistent and objective assessment of the brands strengths, particularly relative to its peers.
- A brand that invests in the initial and ongoing success of its franchisees. A structured and disciplined initial training program, strong and effective support (both validated by existing franchisees) and a brand that makes life easier for external stakeholders to help their franchisees. This can range from reports for lenders that promote improved access to finance to deals with suppliers that help franchisees leverage buying power and receive ongoing professional development.
- Effective due diligence. The franchisee cannot abdicate their responsibility in assessing (with the help of their advisors) the opportunities and risks of the business they are entering.
TIP 7: Ensure your brand can point to external validation of your brand quality through mechanisms such as the new franchise rating system.
TIP 8: Insist on independent legal and financial advice to protect your brand from poorly informed or opportunistic franchisees in instances of business distress.
Documentation
Many observers of the Australian franchise sector remain cynical as to the quality and compliance of individual Disclosure Documents. Many brands elect to update these internally. Some are believed to have only taken a fairly superficial review for emerging risks such as the continued inclusion of Unfair Contract Terms. The expert analysis and advice of several leading law firms of the Inquiry recommendations (and the heightened activity by the ACCC) is encouraging franchise systems to instruct a meaningful review of their documents. This should improve both compliance and the reduction of reputational risk from related breaches.
TIP 9: Now is not the time to be skimping on legal costs. Reputational risk and direct legal liability are squarely in play in the current environment.
Compliance
New challenges have emerged with compliance risk. In recent years franchisors have paid a heavy price for compliance breaches by franchisees. Community expectations, brand damage, direct legal liability and increasingly active regulators have all led to heightened risks from non-compliance.
Quality franchise systems are taking these risks seriously and moving above a reactionary and dislocated approach to more pro-active and structured compliance programs.
TIP 10: Foster an unmistakable culture of compliance; visible, documented, and implemented with rewards and accountability as appropriate.
TIP 11: Develop a formal compliance program that can be produced on inspection and evidences an ongoing commitment to, and development of, required
Conclusion
The 2018 Parliamentary Inquiry into franchising yielded a 370 page report with 71 recommendations that in practice will take many months to review and move to implementation stage.
In the short term underperforming franchise systems, and those placing little emphasis on transparency and compliance, have as much to fear from market forces and regulatory activity as they do from new laws.
Top quality systems have less to fear as they digest the report, take expert legal advice and reinforce their existing strong practices. Above all they are taking pro-active steps to ensure they stand out and are fairly recognised for their good practices and enduring business models.