The parliamentary inquiry made a large number of recommendations designed to improve the transparency and address a perceived power imbalance between franchisors and their franchisees, particularly under franchise agreements as well as the Franchising Code of Conduct.
Some, however, such as Monash Business School senior lecturer Dr Sudha Mani who lodged a submission to the inquiry, have suggested that the ability for franchisees to break an agreement should remain limited.
“Only franchisees that have directly experienced an adverse effect because of the franchisor’s action should have the right to exit or terminate their agreements with the franchisor,” Dr Mani said.
But as specialist franchise adviser Corina Vucic of FC Business Solutions previously told My Business, there appears to be a spike in the number of franchisees looking to part ways with their network.
One such business owner, who wished to remain anonymous for legal reasons, told My Business that they got to the point they would “rather go out of business” because of a lack of transparency and poor value from the franchise fees.
“I think we were prepared for the worst-case scenario: we’d rather not be in business than continue on with the current arrangement... and we were prepared to follow that through,” the franchisee said.
This business owner has now completed their exit from a listed franchise group, after operating for 15 years under two different franchise brands (the result of a takeover), and was lucky enough to do so with the goodwill of the network.
These are their key lessons from undergoing the exit process:
- Determine whether the supply agreements and operating systems are yours or the franchisor’s, as this will impact your ability to trade independently. “All of the systems that we used internally were not [the franchisor’s] systems. We had our own individual supply contracts... none of them were provided by the franchisor.”
- “There is never a good time or a right time to do it,” the business owner said, provided you are prepared for everything needed to separate from the franchise.
- Be logical, not emotional: “At the end of the day, you’ve got to take emotion out of business and just do what’s good for yourself.”
- Proactively reassure your customers: “We were on the front foot, had a lot of FAQs out there, we anticipated some concerns of people... so we were over communicating to our customers that there is nothing to worry about”.
- Rebranding is hard work: Coming up with a new name, logo and brand is a real challenge, and should not be underestimated. Many or even most desirable names may already be taken.
- Try to leave the franchise on good terms.
- It may seem impossible, but it’s not: “Where there’s a will, there’s a way.”
- Seek advice before and during the process: “You certainly need to get some advice, some legal advice — good legal advice will tell you that if you want to get out, you can, and there are steps you can take to mitigate the risks along the way... The typical constraint of trade clause in the contracts which gets everyone a little bit nervous, at the end of the day, is that really enforceable? I would be guided on the advice you get.”
- “The outcome is that you generally get to know your business a little bit better.”
Be sure to exit for the right reasons
While it may seem, at face value, better to be independent than continue paying money to a franchisor, Ms Vucic said that making such a decision should not be taken lightly.
“Don’t wake up and have a knee-jerk reaction because you’ve had a bad day or a bad week. You need to look at the whole time you’ve been with the franchise group,” she said.
“So, if you’ve built a business on the brand and the systems of the entire franchise, and there are things that are done for you that you don’t even need to place input into, then have a look at the longevity of that period of the relationship, because, all of a sudden, running your own website or running your own social media or negotiating your own supplier rates might not seem like a lot of hours or a lot of time, but to a small business owner, that can be very costly — both time-wise and financially — if you pay someone to do it.”
Ms Vucic also said to really think about the factors driving the decision to walk away.
“Is it purely driven by their own successes?” she said, and how much of the customers walking through your door are driven by the franchise rather than your own efforts.
“They’re two very distinctive [factors].”
Thirdly, Ms Vucic said that there can be substantial costs beyond monetary ones, many of which are commonly overlooked when making the decision to leave a franchise.
As such, she urges business owners to consider the “physical and emotional costs” of departing the network.
“Because [as part of a franchise] you’re part of a community, you’re part of a group, you know the known quantity that you’re dealing with, and as a business owner, you have an entity and a profile that sits around that as a person,” Ms Vucic said.
“All of a sudden, you decide that you’re going to go through the angst of coming out of that system, out of that community, and you’re on you’re own, and you’ve then got to rebuild networks to be able to support yourself, both emotionally, physically and everything else that comes with being a business owner.”
Ms Vucic said that even franchisees departing on really good terms may retain relationships with former peers, but that these relationships will naturally dilute over time as the commonalities fade.
“As you go into your next chapter or go on solo, you then become removed from that franchise group just by default,” she said.
“And that’s a big one: people often don’t put a monetary figure on that... as soon as you’re disconnected from a group that’s been your life and your family, there is a hole that has to be filled.”
Legal ramifications can also be tricky, of course, but another crucial thing to factor in is that the franchise could quickly become a major competitor, or make it difficult for you to leave.
“No franchise system is going to allow themselves to lose a sight or lose presence when they’ve spent seven years, or 10 years, or 15 years building up a profile for the brand,” Ms Vucic said.
“So, I’ve asked franchisees to really consider what that looks like, because a franchisor will not let you go easily or allow a brand to default easily in a community.
“And at the end of the day, they’ve got the smarts, they’ve got the accessibility to corporate people to support them, and sometimes for the little guy or little girl, it’s a lot harder to tackle that and still keep sane.”