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| Jul 6, 2008 | |||
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Australian State Inquiry Recommends Changes to Franchise Laws
Submitted by Deanne de Leeuw on Wed, 2008/05/14 - 18:35.
SOUTH AUSTRALIA (Blue MauMau) - On 06 May 2008 the South Australian Parliament released their final report into their Inquiry in Franchising. Excerpts from the South Australian media release, made 07 May 2008:
The full South Australian report (pdf, 104 pgs.) is posted on the Parliamentary website. The Western Australia report is posted on the WA Small Business Development Centre website. Both of these reports will now be tabled at the Small Business Ministerial Council later this month. As many of these recommendations have been made at previous government reviews, it will be interesting to see how the federal government responds. Australian questionsSubmitted by Guest on Sat, 2008/05/17 - 20:14.
In the Recommendation section, there is nothing in general terms about disclosure of the risks of failure. Are you meaning the specific recommendations in the Report, or something different? Is the report suggesting (7.2.12, 7.2.13) that the Covenant of Good Faith and Fair Dealing be an independent cause of action? That it be used to over ride provisions of the contract? Or is it suggesting the Covenant be applied as it is in the United States? P/L ReportingSubmitted by Deanne de Leeuw on Thu, 2008/05/15 - 15:12.
It is a requirement in the Bakers Delight franchise system that P/L reports are provided to the franchisor monthly, or you will be in breach of your franchise agreement! This information, on all stores, is then collated and available to all current franchisees on their extranet website. Bakers Delight are very open about this information collection and use it in their sales pitch as a great service that allows their franchisees to 'benchmark' their own stores against others in the system. This information however is NOT required to be disclosed to potential franchisees, and therefore is not given, when it might actually help make a decision on buying into the system. A quick glance down the 'operating profit' column in any spreadsheet will soon highlight how much 'red' is present and just how successful the whole of the franchise system is. Of course franchisors collect this information. They know everything about their franchises... Re: P/L ReportingSubmitted by jd on Thu, 2008/05/15 - 19:24.
I think there is a big difference in sharing the monthly p&l's with your current franchisees and prospective franchisees, and that is reliance on those financial statements. When you are already in the system, you are using these reports to benchmark yourself against stores that are very similar to help you go forward with your business. If you are outside the system, you would be relying on these statements to determine if you were going to spend a few hundred thousand dollars to purchase a system and if I'm the zor, you have to make sure that those numbers are reliable to disclose, otherwise, you open yourself up to be liable for misrepresented earning claims. Of these financials that Baker's receives, do they 'review' them to make sure that they appear correct or do they plug them into a spreadsheet, and just send out the reports. If this is the case, then you have something similar to a compilation report used in the audit industry, which is just taking a company's numbers and giving no reliance on the accuracy of said numbers. From my experience, you get zee financial statements that are all over the board. Some are great, and some make no sense whatsoever. When things don't 'tie' out, you have to actually investigate why they are wrong. It may be easier in a sophisticated system, but in smaller systems it is much tougher, because most of these zees have no experience with financial statements.
In the USA that is extremely unusual.Submitted by RichardSolomon on Thu, 2008/05/15 - 16:20.
Here franchisors don't want to know that, They may publish monthly sales on their intranet, but not P/L information.-- Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School Unit FinancialsSubmitted by Darnelle White on Thu, 2008/05/15 - 18:03.
There are sophisticated BI (business intelligence) vendors who cater to franchise systems. In real time they collect, integrate, analyze, and present business information, especially financial information that includes Profit and Loss. These systems are especially suited for chains in disperse geographic areas. Many franchise networks have found that they can use BI output to gauge various performance bands for small single stores to large multi-units. Store owners can benchmark their financial performance online. But that is a level of franchise system sophistication that only some networks use - typically the larger ones. That is probably because historically such systems have been expensive and rather fixed. But the costs for such systems, which are considerably more flexible, are very affordable nowadays, even for small franchise networks. Ombudsman for Franchise Dispute ResolutionSubmitted by Juan F on Thu, 2008/05/15 - 07:50.
Blue MauMau-ers, can anyone elaborate on what the statement above means? How is the ombudsman / tribunal function of dispute resolution between franchisees and franchisors implemented by government in the U.S.? Canada? Franchise TribunalSubmitted by michael webster on Thu, 2008/05/15 - 11:25.
It means that I am moving to Australia. The equivalent tribunals are the National Labour Board in the US and Labour Board in Ontario, which deal with disputes in unionized setting. Michael Webster PhD LLB Is the ruleSubmitted by Do Diligence on Thu, 2008/05/15 - 11:41.
in the United Stated in franchising? In my UFOC I see no disclosure in the risk of buying the franchise. It just says it is a risk and may loose your investment. They also have phone numbers of past zees that are not updated. We need the percentage of the risk factor. This makes more sense. Or does it mean we have to be private investicators to get the percentage of risk. If so it should say it. It is a risk to drive, it is a risk to cross a street, it is a risk to get married. But simply stating it is a risk is not enough information to make an educated decision to sign or not to sign. Full Business Risk DisclosureSubmitted by Darnelle White on Thu, 2008/05/15 - 00:37.
"Full disclosure to potential franchisees of the risks of failure..." Now that is quite an undertaking. I'd be curious how the South Australian parliament members think full disclosure of potential risk can be carried out. Wonder how they'll codify and quantify such a requirement. I can see it now. Baker's Delight will be given a risk factor of 15.95, unless parliament raises taxes next year. In that case, it will be 16.23. Risk: Type and ProbabilitySubmitted by Les Stewart on Wed, 2008/05/28 - 04:31.
I think it is entirely possible to create a digital process that would educate potential franchisees and renewals as to the two elements of business risk: type and probability. Type: Before any analysis can be done, the range of negative behaviours needs to be appreciated. Experienced franchise lawyers know this; the conventional wisdom is that you go out and buy the relevant risk disclosure from them. That doesn't work really well for several reasons. Probability: Once you have identified the unique business risks inherent in franchise relationships when compared to independent business (yes there are over 200 types), then you can go about seeing how frequently they may or may not happen over a 10 year period. Without first (1) identifying all material risks and capturing them in an indexed way (which I have at least started) talking about their (2) incidence (UPS, BD, etc.) is moot. Wishing for novices to aquire a Solomon-like grasp of franchising is a fool's errant. Les Stewart MBA ReportSubmitted by michael webster on Wed, 2008/05/14 - 18:46.
The link above is wrong, the final report is here. Michael Webster PhD LLB I love the ruleSubmitted by Do Diligence on Thu, 2008/05/15 - 11:11.
of full disclosure of risk. If that was disclosed in the United States that would save many victims of zors. Get a grip babySubmitted by RichardSolomon on Thu, 2008/05/15 - 13:21.
There is no such thing as full ldisclosure of risk. It aint possible to fully dsiclose risk. No one can account for the "shit happens" contingencies.-- Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School What if a franchise has most of their zees failingSubmitted by Do Diligence on Thu, 2008/05/15 - 13:30.
and they do not disclose it to future franchise wannabees. Isn't that proof the system is high risk? Does this fall in the category of material facts or not? Especially in a new franchise system where most went out of business. Most franchisees failing is usually notSubmitted by RichardSolomon on Thu, 2008/05/15 - 13:35.
documented in the franchisor's data base. To accomplish that a franchisor would have to keep running monthly P/Ls on all her franchisees. No one does that. One of the reasons no one does that is that they don't want to know specifically whether their franchisees are failing. They are satisfied with the generalized scuttlebut they get "from the field". Another reason is that if they had such specific information, they might be forced to disclose it.-- Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School I believe they have this informationSubmitted by Do Diligence on Thu, 2008/05/15 - 13:48.
and don't disclose it. They hide any negative material facts from prospective zees. This is a harsh fact in franchising. In some states material facts before signing an agreement is used against a franchise as misrepresentation and inducment in signing an agreement. Am I right Richard or wrong? Wrong, BabySubmitted by RichardSolomon on Thu, 2008/05/15 - 14:16.
I've been through this issue when I vehemently argued/lobbied to require the keeping of franchisee specific P/L data. It is the most explosive disclosure issue there is. If they had it and had to disclose it, only the most profitable performer would be able to sell franchises. You wouldn't buy a franchise that was measurably underperforming. You would only want the top dog. They also claim that it can't be done on a uniform basis. That is pure BS. It is easy to produce an accounting format in which actual operating revenue and expenses are stated in a uniform manner, until you get to things that could be treated in different ways to satisfy individual franchisee goalsl. These can be treated in a uniform manner for reporting purposes even if they are otherwise treated for tax and financial planning purposes by different franchisees. Things that aren't actual operating expenses are not dealt with - you get a stated ebitda result that leaves out owner compensation as a cost. That is simply left for the potential franchisee to compute on he own after estimating itda. Now watch as people start jumping down my throat claiming I'm full of beans on this issue.-- Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School Link Working, Contributions MadeSubmitted by Mr. Blue MauMau on Thu, 2008/05/15 - 07:13.
The original article is now edited so that the link to the final report (pdf, 104 pgs) of the parliament of South Australia now works. It should be pointed out that the SA Parliamentary Report shows (pg. 6) that some of Blue MauMau's active authors such as Deanne De Leeuw, Jenny Buchan, Les Stewart, and others participated and contributed to the parliamentary hearings. Mr. Blue MauMau Oddly enough, there is a franchise lawyer in AustraliaSubmitted by RichardSolomon on Thu, 2008/05/15 - 04:19.
by the name of Richard Solomon. I see tracks of him from time to time, but nothing outrageous. We are obviously not related by blood or marriage. He's probably some well behaved gent - no fun in a pub.-- Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School You got me on synagoguesSubmitted by Do Diligence on Thu, 2008/05/15 - 11:09.
but not on another Richard Solomon. There is only one Richard Solomon in the world. Thanks,Submitted by RichardSolomon on Thu, 2008/05/15 - 13:37.
Baby-- Richard Solomon, FranchiseRemedies.com, has over 45 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School  |
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