Franchisee rights

Franchises can be a dependable port of call in a crowded marketplace - but many Australians have paid dearly for signing on the franchisee dotted line.
 
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01 .Tough trade

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The number of franchise systems in Australia has nearly doubled in the past 15 years, and despite the prevalence of McDonalds, Subway, Pizza Hut and other overseas operators, nine out of 10 of them are home-grown. These nationwide and regional chains offer convenient access to goods and services that are supposed to meet certain standards - a plus for those who take comfort in the predictable and familiar. For consumers, they can be a dependable port of call in a crowded marketplace. But many Australians have paid dearly for signing on the dotted line to run their own franchise outlet, generally because working for a franchisor turned out to be quite different from what they were led to believe. 

This will come as no surprise to those who’ve been keeping track of the industry, which has been the subject of at least four major government investigations since the 1970s. 

Systemic issues?

Some say the issue of franchisee failure has reached crisis proportions. With about 1137 different types of franchises employing upwards of 400,000 people at last count, franchising generated some $131 billion in revenue last year. It’s a big part of the economy, but the biggest problem for franchisors is finding franchisees. In 2010-11, Australia’s larger franchises spent an average of $75,000 in advertising to get more franchisees on board. 

Franchising certainly hasn’t been a success story for the embittered franchisees who’ve contacted CHOICE in the course of this investigation. The franchisee may run the shop, they say, but franchisors can impose unforeseen costs, force the franchisee to buy overpriced supplies, and fail to provide crucial support. In 2010, the ACCC received more than 600 franchise-related complaints, many of which had to do with misleading claims about franchisees' potential earnings. The root problem, according to the industry experts and former franchisees we’ve spoken with, is that franchisors write up agreements that are weighted heavily in their favour. Some go as far as requiring the franchisee to cover the costs of the franchisor in the case of legal action, or prohibiting joint legal action by franchisees. 

The agreements may also promise that the franchisor will help the franchisee get the shop up and running, but be vague on the details. With little or no business experience, mum-and-dad outfits often sign up on blind trust. But when the costs of meeting the franchisor’s demands are more than the franchisee bargained for - and the promised support doesn’t come through - franchise outlets can fall over. The franchisee can then lose their $300,000-500,000 investment, and the franchisor is free to flip the business to a new franchisee. Even if the franchisee can present an open-and-shut case that the franchisor has breached the industry’s code of conduct, they can rarely afford the legal costs of bringing the case to court. As one ex-franchisee put it, franchisees “can’t afford the cost of justice”.

 
 

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