Financial disclosure lacking, parliamentary inquiry told

Day one is done. The first day of the parliamentary inquiry’s public hearing into the effectiveness of the Franchising Code threw up questions over marketing fund transparency, lack of valuable financial disclosure, an underfunded ACCC, employment liability, breaches that lead to a termination and the need for minimum due diligence standards.

With lack of knowledge about mediation highlighted there was also the question of whether it’s too lopsided to be really worthwhile. Then there are the franchisees who don’t even open their franchise agreement.

That was the case on one occasion when franchisee advocacy firm Franchise Redress was approached by a disgruntled franchisee, the inquiry heard.

However, the directors of Franchise Redress Maddison Johnstone and Michael Fraser, pointed out that franchisors themselves sometimes didn’t do enough due diligence on franchisees. Selling someone a business that was effectively a lemon, even though they hadn’t done their homework, was still wrong, the pair said.

Asked how widespread the case of franchisor wrongdoing is, they said “We would argue that we can’t know the true number of franchisors doing the wrong thing until valid complaints have been investigated”.

There were tales of hardship from former Jamaica Blue franchisees Robert Whittet and Emma Forsyth who claimed lack of support and an ongoing battle with the franchisor eventually led to them losing their stores, and three former Australia Post outlet owners who claimed the government business enterprise had misled them about bank accreditation and the number of licensed post offices it would convert to franchising.

For the committee tasked with investigating whether or not further changes are needed to the Franchising Code of Conduct, there was the question of whether or not an incident or pattern of frachisor behaviour, if validated, would be a breach under existing law or requires further legislation.

Witness proposals

On financial disclosure

Do franchisees have enough information to make an informed decision about buying a business? The issue of franchisor’s financial disclosure was raised by HWL Ebsworth lawyer Derek Sutherland.

“Franchisors are not required to disclose the pie, if you like, about how their revenue is made up…it would be useful to have that, not in terms of actual dollars based on every one, but for the last financial year where did my revenue come from, from franchise royalties, rebates, goods and services supply to the marketing fund.

“From all the different sources of revenue franchisees would have at least a picture before they go in about how the money is being taken.”

Sutherland said there are some significant improvements that can be made to marketing fund transparency.

He also suggested a similar pie chart that could outline to franchisees what the profit is going to be from the business model.

Former Brumby’s franchisor Michael Sherlock, wanted to take the financial transparency further with a limit on the amount of money franchisors can keep from the marketing fund to use for head office expenses.

“There’s a lot of in-confidence commercial stuff but you should consider what the percentage is, put a cap on it, it needs to be regulated.”

Sherlock said the cost of operations is the biggest single concern for franchisees and those who can’t sell their business are locked in “modern day slavery”.

“The money [marketing fund] is there to drive network sales, and these greedy franchisors are keeping to much of it, and it’s wrong,” he told the inquiry.

Sherlock highlighted other aspects where he believes change could be sensibly applied: rebates and the disclosure document.

He accused some franchisors of “clipping the ticket all the way” on rebates and cited one operator who had debadged from a franchise after 30 years and was now paying less for his ingredients as a single operator.

Sherlock proposed a fee summary page outlining all the possible fees, and the value of registration.

“Franchise deeds and disclosure documents should be registered, with the registration fee based on the amount of stores in the network, they should be discoverable for researchers, and the money would go to the ACCC so they would be more resourced.”

On mediation

Head of the Office of Franchising Mediation Adviser Derek Minus said “A common complaint I hear from franchisees is that they have never heard of the existence of the OFMA.”

It was a point reiterated when Franchise Redress’s Maddison Johnstone and Michael Fraser, and witness franchisees, admitted they did not know of the organisation.

But the relevance of mediation was also in question. Maria Varkevisser, a Pack & Send franchisee, had undergone mediation but said there is no power for OFMA to handle breaches.

On collective bargaining

The suggestion that franchisees might be able to collectively bargain was raised early on in the hearing by both Minus and Derek Sutherland. But it’s collectively bargaining with clear limitations, said Sutherland.

“It’s more the dispute based type of negotiation where you have say a marketing fund issue. There is no reason why all the franchisees shouldn’t collectively get together for something that is a collective fund.”

“Where it relates to a change in the system that will affect everybody, like the marketing and advertising fund, to the extent that they contribute to that fund they should be entitled to have a say in that fund.”

On due diligence

Brian Keen of Franchise Simply said a required, points-based level of education would be a start to improve franchisee due diligence.

“Accredited advisers would be very helpful,” he said.