Franchising Code of Conduct – exposure draft

To: smallbusinessfranchising@treasury.gov

Franchising Code of Conduct Exposure Draft Review - Code Review Submission

Prepared by:

Barry Money, Co-Founder, Bane Enterprises & Bane Franchising & Commercial Lawyers

barry@baneenterprises.com

0418 409 233

Franchising Code of Conduct Exposure Draft Review - Code Review Submission

We respectfully submit for consideration the findings of our review of the exposure draft of the Franchising Code of Conduct Review.

Background

Bane Enterprises and Bane Franchising & Commercial Lawyers are sister entities established to provide services to the franchising industry. This includes franchise development programs, franchisee recruitment and franchising & commercial legal services.

Our group promotes ethical, efficient and effective end-to-end solutions for the franchise industry.

Our companies were established on the basis of truthfulness, dependability and growth mindset.

The two founders and respondents to this submission have over 40 years collective service in franchised organisations, franchising law and franchising consulting and recruitment services.

Both founders believe that the entirety of the industry, inclusive of franchising consultants, legal service providers and franchise recruiters should take greater accountability in ensuring transparency and fairness in franchising.

Summary

The purpose of the review of the Code as cited in Chapter 2 – Franchising Industry Code 14(a) is to “address the imbalance of power between franchisors and franchisees and prospective franchisees.”

The imbalance of power is in our opinion but one component of a greater issue. Accordingly, we would like to take this opportunity to call upon Treasury to cast a broader view across the industry and consider the mechanics by which a franchise system is developed and established.

Minimum Criteria to become a Franchisor

While franchisors are required to disclose information about their solvency, there is no obligation to confirm the financial viability of the franchise business system they are encouraging prospective franchisees to invest in.

A straightforward accounting and economic modelling exercise can reveal that certain franchisors either were not ready to franchise or should never have franchised at all. The core issue lies in the business model’s profitability; revenue simply is not sufficient to ensure fair distribution among franchisors, franchisees, and employees.

Although market dynamics may eventually phase out underperforming or unscrupulous operators, "early adopter" franchisees face greater financial risks—as well as potential impacts on their mental health and other associated risks—due to a poorly established franchise system.

The underlying issue often stems from inadequate due diligence by the franchisor at the outset; many fail to recognise that the breakeven point for their corporate-run business will differ from that of a franchise-run business.

Franchisors and the broader supply chain, (including franchise consultants), should adhere to minimum standards to ensure they have a "minimum viable product" before entering the market and selling franchises.

Franchise Supply Chain

The franchising consultant space remains the “Wild West” of the franchise industry.

When unscrupulous franchise consultants adopt a “franchise anything” approach without proper due diligence on financial performance, franchising lawyers draft agreements with little regard for the commercial realities of the system, and franchise recruiters promote inflated versions of the opportunity to unsuspecting franchisee investors — coupled with the low barrier to entry for becoming a franchisor; the franchising industry has, unfortunately, become a “garbage in, garbage out” process.

The franchising industry is shaped by several key contributors:

The business itself, whether or not franchise consultants are involved;

Franchise consultants who assist in establishing the system;

Legal service providers that draft franchise or licensing agreements; and

Franchise recruitment organisations that are compensated for placing franchisees within these systems.

Solutions

How can franchisee investors be protected—or at least given the opportunity for more thorough due diligence—to uncover potential weaknesses within a franchise system?

Franchisee investors can be better protected, and the franchising industry strengthened, by implementing measures that promote transparency and accountability across all parties involved in the franchise process.

Examples include:

Enhanced Disclosure Requirements

Franchisors should provide expanded disclosures, including franchise system financial viability assessments, historical performance data of ‘corporate’ operated and other franchised stores (and clearly state if there is not any historical performance data and why). This would give franchisee investors a clearer view of potential weaknesses.

Mandatory Standards for Franchise Consultants

Franchise consultants should be required to adhere to minimum industry standards, including thorough due diligence on a franchise's financial and operational viability before assisting with system setup. This ensures that franchise consultants do not promote or support franchise systems that lack a sustainable business model.

Accountability for Franchise Consultants’ Advice

Franchise consultants should be required to submit a viability assessment report that covers their review of the franchise’s financial model, market conditions, and operational practices. This report would then be disclosed to potential franchisee investors, holding consultants accountable for the systems they endorse.

Due Diligence Education Programs

Developing educational resources or guidelines for prospective franchisors on the fundamentals of running a financially sustainable franchise network.

By distributing responsibility across franchisors, consultants, and recruitment organisations, these measures provide franchisee investors with the tools needed for informed decision-making while creating a more accountable and ethical franchising environment.

Conclusion

The current Code review makes only minor adjustments to longstanding issues within the franchising industry.

We do not advocate for excessive regulation as this of course can be stifling to innovation and competition.

The Code review is just one part of the solution. A deeper issue lies in how some actors in the franchise supply chain allow unprepared businesses to enter the franchising world, creating weak foundations for these new franchisors with ensuing ramifications for franchisees.

Currently, the Franchise Disclosure Register lacks strict guidelines on data entry and definitions, allowing some franchisors to obscure critical information.

If the Key Facts Sheet is to be removed and the public is to rely solely on the Register, rigorous data standards are essential.

A small but effective improvement would be requiring new franchisors to complete mandatory training before operating in the franchising industry.

This lack of uniformity and effective self-regulation has allowed issues to persist that the Code review is only superficially addressing, further damaging the industry’s reputation.