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Fairness in Franchising – Are you ready?

Australia’s recent Franchising Inquiry, which highlighted significant challenges facing the sector, sparked a flood of commentary from academics, law-makers and industry pundits in the media on the subject of industry-wide regulatory adjustment. Specifically, stakeholders in the franchise industry are keeping a keen eye on the areas that new regulatory frameworks are likely to targetThe writing is on the wall: weighty changes in the regulatory framework governing the franchise sector are imminent. Those conducting business within, or considering buying into, a franchise must be prepared for industry-wide disruption.

The common practice in mature markets, over the last 15 years, has been to revise and update current codes on an ad hoc and periodical basis, and to very little effect. Nevertheless, inefficiency is not ascribed to the quality of the regulation and is regarded as more an issue of enforcement.  More often than not, individual business owners are left to try enforcing their rights through private litigation. This is both costly and an overwhelming undertaking, particularly for young or new franchisees.

Following the Franchising inquiry, the recommendations relating to the fairness inquest taskforce was formed with a mandate to clarify, simplify and explain the rules around franchising ensuring they are understood by all parties. The goal of providing more transparency and clear guidelines to businesses is to reduce and avoid wrongdoing owing to ambiguity. A major directive, in respect of the unit, is the treatment of employees in franchises. The urgency and importance for businesses to ensure employment contractual compliance and proper implementation cannot be overstated. Franchisors must reflect best practice standards and undertake a continuous reassessment of their business operations and standards. And, by consulting with their lawyer regularly they can assure all is above board thus avoiding malpractice in the workplace

The phenomenon of Franchise founders selling out has affected organizational culture, as the parliamentary inquiry confirmed, in unearthing several other related challenges that could have a major impact on how these interpersonal and relational networks operate going forward.

The anecdotal “secret” to success in any franchise system is built largely on the passion of the founder and finding like-minded franchisees who share their passion. This decade has witnessed a wave of local and international franchise founders selling out to publicly listed companies and private investors. This context begs the question, “Can the franchise system succeed without the founder- its heart and soul?  In any business, culture is embedded in and crucial to success. Changing the culture in some franchise systems will prove challenging.

Moreover, compliance remains a pervasive, ongoing challenge for the franchising sector. The task force asserts that franchisors’ “magic formula” for success is striking a balance between assuring franchisees’ operational independence whilst being accountable for ensuring franchisees comply with the law.  Maintaining this balance is often complicated by the “misalignment” between franchise brands interests on the one hand and franchisees’ owned by private equity on the other.

This unlikely marriage of interests proves a very difficult partnership. When private equity ownership and drive a franchise system, needing to worry about the numbers is imperative.

Basic key factors, for success that all franchisees should know and implement, in order to build and grow a compliant and profitable business.

Franchises are often (mistakenly) perceived as companies that are well-established and would offer support for entrepreneurs who wish to start their own business but are wary because of their own inexperience.  While good franchisors may offer mentoring and training sessions on the brand and systems a franchise does not teach franchisees how to run a business. Without some basic business skills, novice business owners are bound to struggle. Investing in getting a formal education to understand the details of operating a business is instrumental for franchisees to compete in a complex and ever-changing business environment.

Franchisors provide prospective new franchisees with significant amounts of information about the investment. It is essential, from the onset, to understand the contract, supporting documentation and to clarify any further inquiries before signing. Additionally, do your own research to get a real-time snapshot of the business.  View the proposed location and measure foot traffic, peak times and competitors before committing to the investment.  Having professional legal and accounting advice is strongly recommended throughout the franchise journey, particularly for signing an agreement, finding out what your financial position is and making the first 24 months projection.  Many young businesses are doomed to fail because people do not have sufficient, sound guidance on what their cash flows are going to be until they establish themselves. While many only accounts for the initial costs, they don’t consider what life will be like without any real income until the business gets off the ground.

The fee structure of a franchise network can be a deal breaker in determining whether a franchise can be run profitably. The type of structure also helps to determine how involved the network is likely to be with the success of its franchisees.  Franchise fees structures based on a fixed percentage of your profits indicates that the network is likely to be more committed to your success and confident of getting more money out of its successful franchises. Conversely, franchisors that just charge a flat rate, regardless of how well or poorly the business does raise a pertinent question on whether the network has franchisees’ best interests at heart.

For more detailed information about the Franchising report, please visit the link and select the pdf report available on the site:

https://www.aph.gov.au/Parliamentary_Business/Committees/Joint/Corporations_and_Financial_Services/Franchising/Report

Please feel free to call us, should you wish to discuss selling our business. Jackie Steinschaden of b.rain is more than happy to answer any questions you may have. Jackie can be contacted 011 243 5030 or email jacquelines@b.rain.org.za