The good, the bad and the ugly: spotting a dud franchise

Sarah Stowe

The franchising model might be a proven one, but not every system is a shining example of what a franchise business can be.

“Good franchising is very good. Good franchising is so much better than independent business operation but bad franchising is so much worse.”

I used these words in my oral testimony to the Committee and the 1997 Fair Trading Report, which led to the introduction of the Franchising Code of Conduct, prefaced its chapter on franchising with the same statement.

These words enshrine a fundamental proposition that was not universally acknowledged in the early days of franchising – that although franchising is a proven model for delivering synergistic benefits to both franchisor and franchisee it is not a magic formula for business success. It is not a form of fairy dust which when liberally sprinkled cover a bad business model converts it into a good business.

This recognition, and the acceptance that although the franchising model is a proven model it can be applied appropriately or inappropriately, has to be the starting point for the prospective franchisee.

Good and bad franchise systems

As a franchising sector we are entitled to take both pride and comfort in the performance of the franchise sector  – but we must also be able to distinguish between the good and bad systems and have the commitment to promote the former and eliminate, or at least discourage, the latter. Despite the proven record of franchising the prospective franchisee must undertake informed due diligence to be satisfied  that the franchisor is actually applying the franchising model and not simply trading off it.

The next stage is of course more difficult. The duds and the lemons and the turkeys are not badged as such and recognising them is not always straightforward. Prospective franchisees can nevertheless take some comfort from the fact that Australia has the world’s most rigorous regulatory regime for franchising.

The Code does not, and cannot, guarantee that those systems offering franchising opportunities will be successful at either a franchisor level or a franchisee level. But the Code – supported by strong laws of general application to all business activities including the prohibition of misleading conduct and of unconscionable conduct  –   discourages rogue franchisors from entering the franchise sector and it offers some prospect of relief from conduct in contravention of it.

The Franchising Code of Conduct

Discouraging rogue franchisors from entering the sector in itself provides a level of protection to prospective franchisees.The introduction of the Code in 1998 led not only to a slowing in the number of franchisors entering the sector but an actual decline in system numbers.

If some franchisors left the sector, and some prospective franchisors decided not to enter the sector, because they could not accept the burdens imposed by the Code to protect franchisees then the sector is much better off without them. The burdens imposed by the Code are not regarded as particularly onerous or inappropriate by the great majority of franchisors and the self–exclusion of those who are not prepared to commit to them is a good result.

Franchisees are also protected by the real consequences to franchisors of non-compliance with the Code and the misleading/unconscionable conduct provisions particularly given active enforcement of the Code and the associated law by the ACCC.

The introduction of the Code has undoubtedly raised standards in Australian franchising by discouraging the entry of the duds. Prospective franchisees can take great comfort from the fact that the really bad and the really ugly systems are much less likely to be gracing the sector but must realise that not every franchise system is really good either.

Unfortunately the stereotypes are not always valid   -those promoting the duds are today unlikely to be brylcreamed, shiney suited, white shoed, cigar smoking dudes.

There is no universally reliable  franchise bullshit detector. There are no easy answers.

As has been said repeatedly the franchisee’s best protection from the franchise duds is informed due diligence for which the prior disclosure information is the starting point. It’s a rigorous exercise but it’s worth it. For George Katona business may be like sex –“when its good its very, very good; when it’s not so good it’s still good” – but a failed franchisee is unlikely to agree.