Boosting franchise clarity will help due diligence, says UNSW academic

The current Senate inquiry should lead to improved franchise transparency to help franchise buyers get better information from their due diligence.

That’s according to Professor Jenny Buchan at the University of New South Wales Business School.

Interviewed in a podcast on the pros and cons of franchising for ABC’s Nightlife, Buchan called for greater clarity around the number and identity of franchisors in Australia, and for a spotlight to shine on each franchise organisation and its staff.

Asked by host Philip Clark what should come out of the Senate inquiry, Buchan said “There should be a database run by the ACCC that has got all the franchisors in Australia on it, as currently exists in Minnesota, California and other states in US.”

She also called for an improved dispute resolution process and better information about franchise complaints so interested parties could uncover any disputes in a system.

Buchan pinpointed organisational transparency as an area for improvement.

“It’s very important for franchisors to provide an entire organisational chart in their disclosure document with every single player named and what their role is so franchisees can check out who everybody is, they can do a proper credit reference search on every single person in the network and if there’s anybody with a bad credit rating, they can run a mile.

“We also need to know very explicitly which way the money is going to flow in each system a franchisee is looking to buy into.”

Buchan was joined in the podcast by Jason Gehrke of the Franchise Advisory Centre.

Gehrke reiterated the need for thorough research and pointed out that buyers often make emotionally-driven decisions in the due diligence process.

“It’s very much led by the heart not by the head. People often go to an accountant or lawyer to get advice prior to buying a business merely to validate the decision they’ve already made, rather than, quite literally, assess whether the decision is viable,” he told the ABC.

Defining due diligence as “the care a reasonable person will take before committing a transaction”, he said “If someone commits to a transaction before taking care, that’s not a good fit for franchising at the best of times”.

Gehrke is a regular contributor to Inside Franchise Business. In a recent article ‘How much is too much to pay for a franchise‘ he cautioned franchise buyers: “The vast amount of information available to you as a buyer of a house prior to purchase gives you much more confidence in the decision to buy a house compared to buying a business,” he said.

Calls for improved transparency have come from other quarters of the franchise industry too, with the first day of the parliamentary inquiry’s public hearing in June throwing up questions over the lack of financial disclosure.