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Australia Asks: Franchising, a License to Print Money?

McDonald's has licensed franchises in Australia. photo by BMMThe Australian Broadcasting Corporation radio show Rear Vision interviews San Diego-based Robert Purvin, author of The Franchise Fraud: How to Protect Yourself Before and After You Invest, and Sydney-based Jenny Buchan, author of Franchisees as Consumers. Purvin, chair of the American Association of Franchisees and Dealers and scholar Buchan of the Australian School of Business, University of New South Wales speak with Australian Broadcasting Corporation's Radio National reporters on the history of franchising and whether modern business-format franchising has morphed into a license to print money for franchisors.

On the historical origin of franchises and royalties:

Robert Purvin: We trace franchising back...to the Pope in the 12th century granting various local priests the right to represent the Catholic Church and to open a parish, in exchange for which the parish was required to send a tithe back to the Church. And local parishes were given authority by the Pope to represent the Catholic Church throughout Europe. And this was really dated to the 12th century. Various nobleman and monarchs said, hey, this is a pretty good idea, and began creating a situation where local peasants, then call serfs, could farm land that was owned by the noblemen or by the monarch, and in exchange for which they also paid a tithe but it was a royal tithe, which now is shortened to the world 'royalty'.

On problems with modern business format franchising:

Senior Lecturer Jenny Buchan of the University of New South WalesJenny Buchan: to use an extreme example, the governing law of the Subway contract is Connecticut, USA. So that in theory if a local franchisee in Sydney had a problem which ultimately required litigation against the franchisor, that court action would take place in Connecticut. Obviously that's ridiculous, so fortunately the Franchising Code of Conduct provides an interim step which is compulsory mediation, and that would occur in Australia. So hopefully the franchisee would be able to reach a conclusion at that stage.

Robert Purvin, chair of the American Association of Franchisees and DealersRobert Purvin: over the last 60 years franchise agreements have so evolved in a manner that is in opposition to the interests of franchisees that 60 years ago when you bought a franchise you could rightly say you were a business owner operating under license from a company to use their brand but it was your business, and today in most instances what you are doing is renting the right to operate somebody else's business, the McDonald's model I might say, rather than really being a true business owner.

On franchisees pushing the system for their interests:

Robert Purvin: Our economic capabilities [of franchisees' persuading legislators] paled by comparison to the International Franchise Association which represents the franchisors of the world. So there hasn't been a huge success until very recently at getting legislative modifications. Our [the American Association of Franchisees and Dealers'] effort was initially to get law passed but we had no legislative muscle, so we turned our attention to organising franchisees and to effective bargaining units with the goal of beginning to negotiate better agreements.

On solutions to franchising abuse:

Jenny Buchan: One way that these problems could be addressed is by franchisors having some governance duties towards franchisees. Franchisor's directors have corporate governance duties through the Corporations Act. Those Corporations Act governance duties do not extend to contracting parties like franchisees, but those franchisees are the very lifeblood of the business. And so it seems to me that it would be worth considering whether franchisors should, for instance, owe a duty of care to the franchisees to manage the franchisor's business in a way that ensures that the franchisee's business has still got a chance to proceed viably.

You can hear or download the entire interview here (The mp3 file takes time to load.)

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