Fairness in franchising

fairness-in-franchise

As the business environment gets more difficult due to socio-economic and political influences in South Africa, the question of fairness in franchising has become a hot topic – both locally and internationally. FASA regularly fields complaints from franchisees on the fairness of their contracts in relation to everything from false promises, non-disclosure by the franchisors of failed franchisees, selling of outlets in close proximity of fellow franchisees to excessive supplier costs and marketing contributions and the refund of deposits.

According to Vera Valasis, Executive Director of FASA, “whilst some of the issues raised are in direct violation of the Consumer Protection Act, other complaints are a result of difficult economic conditions that all businesses are facing and the inability of franchisors to adapt their franchise model to the needs and long-term viability of their franchisees. As FASA has no legislative powers to act against unscrupulous franchisors, it can only rely on ethical franchise brands seeing the benefits of belonging to an association to which they have pledged to abide by international franchise ethics and for prospective franchisees to make sure that the franchise they are buying is a member of FASA.”

The countries that have franchise legislation in place are continually adjusting their regulatory frameworks to not only reflect the trends that are reshaping the business environment but also to clarify and simplify the rules around franchising. FASA member b.rain has unpacked Australia’s recent franchising inquiry and gives our local franchisors some key insights on how to build and grow a compliant and profitable business.

Australia’s regulatory adjustment

Australia’s recent Franchising Inquiry, which highlighted significant challenges facing the sector, sparked a flood of commentary from academics, law-makers and industry pundits in the media on the subject of industry-wide regulatory adjustment. Specifically, stakeholders in the franchise industry are keeping a keen eye on the areas that new regulatory frameworks are likely to target. The writing is on the wall: weighty changes in the regulatory framework governing the franchise sector are imminent. Those conducting business within, or considering buying into, a franchise must be prepared for industry-wide disruption.

The common practice in mature markets, over the last 15 years, has been to revise and update current codes on an ad hoc and periodical basis, and to very little effect. Nevertheless, the inefficiency is not ascribed to quality of the regulation and is regarded more an issue of enforcement. More often than not, individual business owners are left to try enforcing their rights through private litigation. This is both costly and an overwhelming undertaking, particularly for young or new franchisees.

Following the Franchising inquiry, the recommendations relating to the fairness inquest task force was formed with a mandate to clarify, simplify and explain the rules around franchising ensuring they are understood by all parties. The goal in providing more transparency and clear guidelines to businesses is to reduce and avoid wrongdoing owing to ambiguity. A major directive, in respect of the unit, is the treatment of employees in franchises. The urgency and importance for businesses to ensure employment contractual compliance and proper implementation of cannot be overstated. Franchisors must reflect best practice standards and undertake continuous reassessment of their business operations and standards. And, by consulting with their lawyer regularly they can assure all is above board thus avoiding malpractice in the workplace.

The phenomenon of Franchise founders selling out has affected organizational culture, as the parliamentary inquiry confirmed, in unearthing several other related challenges which could have a major impact on how these interpersonal and relational networks operate going forward.

The anecdotal “secret” to success in any franchise system is built largely on the passion of the founder and finding like-minded franchisees who share their passion. This decade has witnessed a wave of local and international franchise founders selling out to publicly listed companies and private investors. This context begs the question, “Can the franchise system succeed without the founder- its heart and soul? In any business, culture is embedded in and crucial to success. Changing the culture in some franchise systems will prove challenging.

Moreover, compliance remains a pervasive, ongoing challenge for the franchising sector. The task force asserts that franchisors’ “magic formula” for success is striking a balance between assuring franchisees’ operational independence whilst being accountable for ensuring franchisees comply with the law. Maintaining this balance is often complicated by the “misalignment” between franchise brands interests on the one hand and franchisees’ owned by private equity on the other.

This unlikely marriage of interests proves a very difficult partnership. When private equity own and drive a franchise system, needing to worry about the numbers is an imperative.

For more detailed information about the Franchising report, please visit the Parliament of Australia’s website and select the pdf report available on the site:

 

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