INTHEBLACK June/July 2024 - Magazine - Page 42
F E AT U R E
“There is a recommendation that a franchise agreement
has to provide a reasonable opportunity for the franchisee
to expect a return on investment, including provision for
compensation in the event of early termination,” Schaper
explains. “This already exists for new vehicle dealerships,
but not other industries.”
DR MICHAEL SCHAPER, FRANCHISING CODE OF CONDUCT REVIEW
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franchisors have not reviewed their pricing
structure to reflect this.
“They are simply passing these increased
costs on to franchisees, without looking
to see if they can change their model to
adapt to the ‘new normal’,” he explains.
Profitability has consequently decreased,
Knight adds, making it harder for
franchisees to achieve a strong return
on investment.
PROTECTIONS TO DRIVE GROWTH
In August 2023, the Australian
Government announced a review of the
Franchising Code of Conduct. The Code
is due to sunset on 1 April 2025. This is
the latest in a long line of reviews, including
the 2019 Parliamentary Joint Committee
on Corporations and Financial Services’
Fairness in Franchising report.
Tabling the review to Parliament on
8 February 2024, Minister for Small
Business Julie Collins MP said the review
was “an opportunity for government to
make sure the regulatory settings support
the sustainability and growth of franchising
into the future”.
Among the report’s 23 recommendations
and 34 implementation suggestions, one
in particular has the potential to revitalise
growth, says Dr Michael Schaper, who
chaired the independent review.
“There is a recommendation that
a franchise agreement has to provide
a reasonable opportunity for the franchisee
to expect a return on investment, including
provision for compensation in the event
of early termination,” Schaper explains.
“This already exists for new vehicle
dealerships, but not other industries.”
Such protections would likely encourage
would-be franchisees to invest with more
confidence, Schaper says. “If you know you
have a legal right to get a decent return,
42 INTHEBLACK June/July 2024
it is going to make you feel a lot better
about entering into the contract.”
In addition, the review recommends
further consideration be given to the
Australian Competition and Consumer
Commission’s proposal to introduce
a licencing system that would “provide
a more robust compliance framework and
reduce the harms that persist in franchising”.
Mirroring existing determinative schemes,
such as the Telecommunications Industry
Ombudsman and the Australian Financial
Complaints Authority, a licence regime
would allow a regulator to suspend, cancel
and impose conditions on a franchisor’s ability
to promote and sell franchises, and facilitate
efficient and binding resolution of disputes.
This could potentially move disputes
away from the court system, Schaper says,
which would enable minor issues to be
resolved quickly and at minimal cost in
comparison with the current model.
“It might conceivably allow the regulating
body to say certain franchisors are no
longer allowed to trade,” Schaper adds.
“We strike off doctors and lawyers who
are found to be incompetent or unable
to practice and, in some industries, you
need a licence to operate, but you don’t
with franchising.”
THE ROLE OF GOODWILL
One of the foundational – and most
controversial – issues raised about franchising
relates to goodwill, the review has found.
The problem stems in large part from
franchisees’ lack of awareness around
what they are – and are not – entitled to
at the end of their contract. While some
believe they may have a right to payment
for the “value added” they have delivered to
a franchise system, more than 80 per cent
of franchise agreements explicitly exclude
franchisee goodwill.
