Two franchising lawyers have opened up on the challenges facing the sector in light of the franchising inquiry, and the areas new regulatory frameworks are likely to target.
Spencer Slasberg (pictured) of Bennett & Philp has urged anyone already conducting business within, or contemplating buying into, a franchise to prepare for a major shake-up of the regulatory framework governing the sector.
“The current codes and regulations have been revised and updated periodically over the last 15 years to very little effect, and I believe that is more an issue of enforcement rather than quality of the regulation,” Mr Slasberg said.
“For too long, it has been left to individual business owners to try and enforce their rights through private litigation, and that can be an expensive and daunting process for young punters.”
Mr Slasberg said that the recommendations of the Fairness in Franchising inquiry should help to simplify the rules around franchising and create more transparency for all parties.
“I am hopeful that these changes will also provide businesses with clear and transparent guidelines to avoid any wrongdoing due to ambiguity,” he said.
“One major call to action in respect of this taskforce will be the treatment of employees in the franchises, so it is important for businesses to ensure all employment contracts are compliant and rights are being properly implemented.
“Franchisors should be alert and reflect best practice standards by consulting with their lawyer and continually reassessing their business operations and standards, guaranteeing they are all above board and avoiding any malpractice in the workplace.”
Founders selling out contributing to culture breakdown
In a recent interview with My Business sister publication Lawyers Weekly, the franchising partner at law firm Piper Alderman, Andrea Pane, said that “a number of challenges have emerged out of the parliamentary inquiry”, ones which could have a major impact on how these networks operate going forward.
“Success in any franchise system is almost always built on the passion of the founder and finding franchisees who share that passion,” Ms Pane said.
“With founders selling out to publicly listed companies and private investors, the question that needs to be asked is, ‘Can the franchise system succeed without its heart and soul — the founder?’
“Like any business, culture is crucial to the success of a franchise system. And changing the culture in some franchise systems will be challenging.”
She said that compliance remains another, ongoing, challenge for the franchising sector.
“Franchisors need to find a balance between franchisees operating independently and ensuring franchisees comply with the law.”
Ms Pane’s comments echo those of franchise adviser and long-time industry advocate Corina Vucic, who previously told My Business of a “misalignment” between the interests of franchise brands and franchisees when they are owned by private equity.
“When the two come together, there’s a misalignment, and it’s very, very difficult to have a private equity own and drive a franchise system without needing to worry about the numbers,” she said.
Need-to-know factors for franchisees
According to Mr Slasberg, there are a few key factors that any and every franchisee should know and abide by, in order to build and grow a successful, compliant, profitable business.
Learn the basic skills of running a business
“People who wish to start their own business, but are hesitant because of their inexperience, often turn to franchises as they view them as well-established companies that would offer support. This is not the case,” he said.
“A franchise does not teach you how to run a business. Good franchisors may offer mentoring and training sessions on the brand and systems, but without some basic business skills, novice punters are bound to struggle.”
He urged franchisees to get themselves an education, such as a Diploma of Business, to better understand the ins and outs of operating a business.
Do your research
The significant amount of information that franchisors do (or at least should) provide to any prospective new franchisee is not done for their own amusement.
Mr Slasberg said it is crucial from the outset to understand the contract and supporting documentation before signing.
“It is your best chance to get a snapshot of the business and find out if you have any further enquiries before committing to the investment,” he said.
“Further, ensure you research the proposed location to view foot traffic, peak times and competitors.”
Seek professional advice
Advice is another factor that can be really important throughout the franchise journey, but particularly at the point of signing an agreement.
“It’s strongly recommended to invest in professional legal and accounting advice very early on, to find out what your financial position actually is and what it is projected to be in the first 24 months,” Mr Slasberg said.
“This is where most young businesses fail, because people do not receive enough guidance on what their cash flows are going to be until they establish themselves. While many only account for the initial costs, they don’t consider what life will be like without any real income until the business gets off the ground.”
Understand the franchise fee structure and ask questions
The fee structure of a franchise network can really be the make or break on whether a franchise can be run profitably. However, Mr Slasberg said that the type of structure can also help determine how involved the network is likely to be with the success of their franchisees.
“A franchise that structures its fees based on a fixed percentage of your profits tends to be more committed to your success and confident of getting more money out of its successful franchisees,” he said.
“Franchisors that just charge a flat rate, no matter how well or poorly your business runs, may not have your best interests at heart. That’s not to say they don’t, but it does raise another question for you to ask.”
Adam Zuchetti is the editor of My Business, and has steered the publication’s editorial direction since early 2016.