Washington Trade Lobbyist Warns Against Changing Australian Franchise Law
The IFA is comprised of some 1,300 franchisor members out of an estimated 4,000 franchise systems in the United States. Out of an estimated 900,000 franchise-related establishments, the IFA includes some 10,000 franchisee members, who receive free membership through their member franchisors.
The franchise sector in Australia is facing political pressure as a number of angry franchise owners have brought stories of fraud to the attention of the media and parliamentarians. An unprecedented eight members of parliament spoke about problems in the sector and are advocating franchisor registration to provide basic investment information to franchise buyers.
In response, on Monday the IFA issued a warning that such moves in Australia may do more harm than good. “The IFA considers mandatory registration to be archaic, costly and burdensome for both franchisors and government while providing no measurable public policy benefit to prospective franchisees,” the IFA stated. “We are aware of no data in the United States that shows that franchise investors in states with registrations requirements are more adequately protected from sales fraud than investors in state (sic) without registration.”
But Scott Shane, a professor of entrepreneurial studies at Case Western Reserve University and an author of numerous studies on franchising and entrepreneurship, disagrees with the notion that there are no such studies that show the benefits of franchise registration. Studies published in his book, From Ice Cream to the Internet: Using Franchising to Drive Growth and Profits of Your Company, show that registration can create healthier franchisors because of better transparency and investor confidence. “There are a variety of studies that show that franchisors operating in registration states are more likely to survive over time than franchisors that do not,” he states. “Franchisor survivors, those who continue to work and operate as a business entity, are 22 percent more likely to operate in a registration state than failures. Moreover, the benefits of operating in registration states increase with system size. These patterns strongly suggest that operating in a registration state makes it easier to attract franchisees because adherence to the registration requirements shows that you are not a fly-by-night operation.”
The IFA explains that unlike what Australia is considering, in the United States there is no federal franchise registration requirement. Rather, there is a mandatory federal rule by the Federal Trade Commission (FTC) that requires a disclosure document template that states use. States the IFA, “Disclosure documents required by the FTC make comprehensive information available to prospective franchisees, including litigation and bankruptcy history, and that of their officers and directors; the initial investment, royalty, advertising fund and other fees; the rights and obligations of both the franchisor and franchisee; the conditions under which the franchise can be transferred, terminated or not renewed; and the restrictions on what the franchisee may sell or is required to purchase from the franchisor.”
The association warns that Australia’s removal of the foreign franchisor exemption may dampen the interest of American firms. “The extension of these regulatory requirements to all U.S. franchisors of systems operating in Australia has resulted in additional administrative and legal costs which must be taken into account by franchisors looking to enter the Australian market,” states the IFA.
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Related reading:
Studies Show Registration Benefits Franchisors and Franchise Buyers
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