Do franchisees understand the full impact of their franchise agreements? It’s a pertinent question after the media’s recent spotlight on 7-Eleven’s end-of-term store takeovers.
Franchise Executives spoke with ACCC deputy chair Mick Keogh about common causes of friction in franchising and why franchisees can fail to understand the implications of the contract they have signed.
A starting point can be franchisors who apply sales tactics and inject a sense of urgency into franchise recruitment. This approach contributes to potential franchisees’ desire to ‘get the deal done’, Keogh said.
The resulting sale can lead to unhappy franchisees seeking solutions for a situation they weren’t prepared for.
“Often potential franchisees see a franchise as a job replacement strategy. We see in some instances, franchisors applying sales tactics – telling franchise buyers ‘you’ll have to respond quickly’.
“Despite the provisions built in to the Franchising Code about cooling off and the requirement for legal advice, this sales process seemingly results in potential franchisees forgoing this right, or doing it in a cursory manner; it becomes about getting the deal done,” Keogh told Franchise Executives.
The mistake of skipping proper legal advice is often made worse by what a franchisee thinks they are actually buying, he said
A franchise is a licence to operate
“There’s the issue of misunderstanding the nature of a franchise contract. It is often sold as an investment, but in reality, most franchises are a licence to operate for a certain time,” he said.
Keogh said franchisees who get in touch with the ACCC quite often have reached the end of their term expecting to transfer and sell the business, and are surprised when buyers are rejected and the business agreement terminated.
Misunderstandings remain at the heart of complaints to the ACCC and Keogh urged franchisors to be as transparent as possible in their dealings with franchise buyers.
He highlighted the supply chain and marketing fund as areas commonly misunderstood by franchisees.
“They often don’t fully understand their inputs will be sourced through the franchisor and cheaper supplies may not be an option.
Robust franchisors have good obligations in their entry process
“There’s been a lot of controversy and enforcement action around the marketing fund. The reforms to the Code have broadened beyond that and marketing is now a special purpose fund and the franchisor has obligations around transparency on that,” Keogh said.
He encourages franchisors to ensure their incoming franchisees are more informed before signing up to a franchise.
“Some better franchises require their franchisees to undertake training before making the final decision. The more robust franchisors have quite good obligations in their entry process. That’s sensible because then you’ve got a well-informed and more positive franchisee,” Keogh said.
“These are all incremental improvements in how a franchise might operate,” he said.
