Franchising rules
Just because a business becomes a franchise doesn't mean it will work, writes Peter Switzer

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24 February 2006

IT'S an industry, we are told, in which only 8per cent of participants are unhappy and it contributes more than 10per cent, or $80billion, to Australia's total production of goods and services. But in the US, an expert argues that 50 per cent of businesses in the equivalent industry are "crap".

What industry are we talking about? Franchising.

Talk to the owners of Australia's reigning No1 franchise operation, Nabi Saleh and Peter Irvine of Gloria Jean's Coffees, which was named 2005 Franchisor of the Year, and they have a different story.

The pair's award-winning franchise now has 165 stores in Australia and despite coffee shops everywhere, the business grows.

Irvine says they have tried to cultivate a family atmosphere and it's working at the moment.

Bill Lockett, of the Franchise Systems Group, says it is a mistake to believe that because something becomes a franchise that it will work.

Franchises can hit critical mass and it is always good to be able to pick a franchise on the way up that will grow bigger, Lockett says. Get in when there's less competition. "The healthy businesses are doing well at the moment. And there's still plenty of potential."

Franchising has long boasted that it is the most successful business model, with fewer bankruptcies and more profitable businesses than any other form of small business.

It also has the federal Government's seal of approval.

"Franchising is a vibrant and innovative way to do business -- and it employs just over 600,000 Australians," Small Business Minister Fran Bailey said at the Franchise Council of Australia's award night last year. "The Australian Government is a strong supporter of franchising and will continue to work with businesses in key areas such as workplace relations, red tape reduction and taxation."

The industry has flourished since the Howard Government introduced regulations in the form of the Franchising Code of Conduct to reduce the incidence of franchisors misleading potential franchisees.

Franchise Council of Australia chief executive Richard Evans is proud of franchising's achievements. "It contributes 10per cent to the economy and employs more than 600,000 people in over 64,000 workplaces," he says.

But pioneer franchise system developer Howard Bellin, of IF Consulting, warns new entrants to tread carefully when selecting a franchise.

"Sadly, many Australian franchises are sold to retrenched people who are simply buying a job," he says. "How much goodwill does a dog-washing, window-washing or lawn-mowing franchise command when a franchisee decides to sell?"

Bellin argues the Australian legal system stifles franchisee rights. In the US, aggrieved franchisees can bring class actions against franchisors and, if a franchisor loses, it pays not only compensatory damages, but also treble punitive damages. Also, US lawyers work on contingency, earning one-third of the damages assessed if they win and nothing if they lose.

"In Australia, litigants with the deepest pockets usually win," Bellin says.

Attempts to form a franchisees association have failed at least three times. While the FCA welcomes franchisees, realistically it is a franchisors association.

And a court win for a franchisor last year has made buying into a franchise even more of a caveat emptor -- buyer beware -- situation.

Bellin points to US expert Kent Craven of Franchise Resource Co, who puts would-be franchisees into franchise businesses and who was interviewed by the Boston Globe newspaper.

Asked about franchising's less-risky business tag, his reply was sobering.

"I caught some flack last year when I was quoted in a magazine article as saying that half of all franchises are crap," he said. "But it's the truth -- half are crap."

Craven is cautious about franchising being seen as virtually foolproof. "Not only can you fail, it can drive you crazy, literally," he said. "In one case, the franchisee not only lost every dime -- her house, everything -- she ended up in a mental health facility."

Right now, Australian franchising seems happy. Psychologist Greg Nathan released statistics pointing to fairly happy franchisees.

In his The Franchise Relationship Balance Sheet, Nathan found:

· 92 per cent of franchisees say they enjoy their roles and work;

· 80 per cent believe their franchisor treats them fairly;

· 57 per cent of franchisees are currently satisfied with profit.

The numbers give out a loud warning. If you are in the market for a franchise, make sure you are not in the one-in-five franchisee category that thinks their franchisor treats them unfairly. And hope you are not in the 43 per cent who are unhappy with their profit.