Franchising fallacies: why you need to examine the fine print

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This was published 7 years ago

Franchising fallacies: why you need to examine the fine print

Is buying into a franchise worth the investment?

By Michael Schaper

Is buying into a franchise worth the investment? Recent disputes between franchisors and franchisees of popular brands such as Nandos, Eagle Boys and 7-Eleven would suggest franchises are risky business.

However, enterprising Australians do love a franchise: we have about 1200 different franchise systems operating, licensing almost 80,000 franchisees. This is one of the highest rates of penetration in the world.

Franchising seems like a safe bet but that's not always true.

Franchising seems like a safe bet but that's not always true.Credit: Marina Oliphant

And why not? Most franchises are a sure bet, it would seem at first glance. You're buying into a proven system with an established product, customer base and business operating system. Add to that a parent company or franchisor that is also invested in your eventual success, and it seems obvious that franchisees are destined to have a pretty good survival rate. That's a much better bet than starting off your own independent business, where less than half of all firms survive for more than five years.

The reality, however, can often be different. Franchising is no easy ride for the unwary.

Even well known franchises can fail under the right circumstances.

Even well known franchises can fail under the right circumstances.Credit: Louise Kennerley

Failure rates are much higher than many people acknowledge. Contrary to popular opinion, evidence from both Britain and the US suggests survival rates for franchisees are no better than that of stand-alone start-ups.

And when a franchisor goes into administration or insolvency – such as recently happened to Eagle Boys – then franchisees can effectively become hostage to the ultimate success or failure of a corporate restructuring. These collapses are more frequent than most people realise: think Kleenmaid (home appliances), Kleins (jewellery) and Strathfield (electronics).

Would-be franchisees also need to be careful about exactly who it is they're shacking up with. While most of our franchise systems are credible, well-established and competently-run brands, there are always a small number of sharks circling in the water, waiting to take advantage of naive victims making their first forays into the business world.

We're fortunate in Australia to have one of the oldest and most comprehensive franchising regulatory systems in the world. The national Franchising Code of Conduct is mandatory for all players in the market and has a number of features to help balance up the franchisor-franchisee relationship. There's a substantial body of information disclosure required upfront, a cooling-off period, and access to dispute settlement procedures. Recent changes have also introduced a requirement for "good faith" behaviour, and now permit infringement notices and court-based financial penalties for breaches of the law.

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Yet ultimately the law can only go so far. One sobering recent statistic collected by Griffith University's franchising research centre showed while most would-be franchisees said they had taken legal or accounting advice before signing a franchise agreement and all it commits them to, less than half had actually obtained such help. Good rules and solid enforcement are important in maintaining our world-leading role in franchising, but so too is a community of well-informed prospective franchisees. Finding out the facts will always be more important than relying on the fallacies.

Dr Michael Schaper is the deputy chairman of the Australian Competition & Consumer Commission, the national regulator of the franchising sector.

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