Australian Franchise Law: Assurances of Protection or Just More Christians Thrown to the Lions?

My perspective on franchise relationships causes me to distrust government regulation of market places.

Government regulation is always influenced more by interests with well funded influence capabilities that tilt the table in their favor over those of the potential class of persons to be protected. That belief comes from participation in the enactment of such legislation and the enforcement regulations promulgated by the agencies to which enforcement is assigned. In every such process where I was a participant, industry positions were without exception more graciously received.

As a law practitioner in the subject, representing franchisors and franchisees – both sides of every issue over the years – it has been my view that regulation is largely ineffective in all save the appearance of efficacy. The market place still has its own morality. Government regulation never improves market practices to the point of its announced intentions. My personal view is that this is positive, as I instinctively distrust government.

Those who specialize in the area acquire, over time, sufficient capability to serve the investing public that wishes to access the assistance. Those who do not, and who believe they can outsmart firms that make their livelihood via aggressive investment selling practices are naïve in the extreme. They are the population of failures described in the customary statistical base regarding the likelihood of business investment failure. Investors who include the expense of competent due diligence before the fact much more rarely fail in the enterprise.

In my view, the unsuccessful franchisees represent investors who regard small business investment as a fairy tale or religious practice in which one is expected to take what is stated in the sales brochure on faith – an absurd approach. If one invests without adequate preparation, the result will not be unlike the result in any endeavor undertaken by the incompetent.

Courses of study by trade/industry associations and academics who accept endowments from the industry do not produce education inconsistent with the views of the endowing interests. This has always been the case with university “studies” and educational programs. There would be no endowment unless the agenda is served from which the payments came. These are, in my view, no more reliable sources of protection than the legislation. If one were to become familiar with the terms of university research endowment agreements currently in use, the prerogatives of the endowing interests always guarantee the result of the research findings. Academia rarely turns down research funds because they require the research to yield a certain result.

Like all government initiatives, this one starts with failure statistics. The statistics are presumed to tell the “story”, while, in my experience, how the statistics came to be the statistics is the real story. While I recognize that the culture of Australia is somewhat different than that in the USA, the franchising dynamic in Australia comes from the USA, and the morals of the USA market place came with it. For that reason, I would expect to see Australian franchise regulation be and remain as ineffective as it is in the USA.

Despite the temptation of the consumer protectionist to attempt to impose a securities investment regulatory scheme upon franchise investing, it is important to note that securities regulation fails to police the major portion of securities fraud just as franchise regulation fails to police franchise fraud. The regulations are easily circumvented by burying the accusable statements in otherwise reliable information that is tailored to suggest a positive investment decision where the realities are otherwise.

It is for these reasons that I long ago stopped wasting time with government agendas and academic programs addressed to franchise investing abuses. Capable investors have adequate resources in the market place, and the incapable can never be protected from their own lack of skill.

Illustratively, the risks associated with the failure of the franchisor can rarely be identified, despite the fact that in the USA approximately 70 % of new franchise systems are in failure mode within five years. The experienced can discern the institutional weaknesses. Academics who don’t live in that reality, and regulators who never have resources to immerse themselves sufficiently in it to become expertly apprised, do not produce policing capability of a reliable quality. In the USA it is the experience that the adoption of legislation without also providing resources for adequate enforcement is more the rule. The legislation becomes a charade, but the charade is taught in universities as though it were other than mere drama.

One might with greater profit sort how many significant metropolitan markets there are in Australia. Having accounted for these, and for the capability of the Australian culture to come up with its own business replication models geared to that comparatively limited market, it is rational to question the validity of assumptions that there is demand for foreign franchise entry. That something had an apparent success in the USA does not automatically translate into the same experience in Australia. Moreover, a more careful definition of “success” might more readily yield a significant index of likely failure in Australia.

If the franchisees of a system in America are dying on the vine financially, what difference does it make if the system sells ten million sandwiches/other products or services a month in America and in Canada. Dealer failure in its native land bespeaks bleak prospects for success elsewhere. Would Australian franchise regulation require disclosure of true failure rates in other world markets (not the IFA definition of failure, but actual failure by a dealer in a store)? Not bloody likely. Will the Australian regulatory scheme require franchisees to have termination without penalty options upon the failure to achieve stated performance levels (stated in profits not gross sales)? Not bloody likely. Will there be bonds required from franchisors to assure that their franchise systems perform as they say they will in their marketing brochures? Not bloody likely. Will Australian franchise investors more frequently resort to killer pre investment due diligence than their American counterparts? Not bloody likely. Will Australia become a dumping ground for over the hill concepts that can no longer find growth in America? Yes it will in very many cases. Will American franchise cmopanies pre-empt the market, stifling Australian concept creation? Probably. Will the flavors of Australian culture now found in its native small businesses be lost or diluted? Of course. Now aint that a shame?

Will the Australian regulatory scheme track the franchisor advantaged regulatory scheme in America? You’re damn right it will. If that is what’s in store for our friends down under, why the hell do it at all?

Isn’t it bad enough that America blindsides its citizens with a pretense of investment protection in the franchise business? Why are the Aussies considering a similar system for themselves? Are they so self loathing that they would consciously set their own people up for investment disaster?

Because there are so few major market opportunities in Australia, the likelihood of brand failure there is greater than the American experience. Mistakes can’t be buried in the large numbers in Australia like they can be in America. When the IFA is finished with the Australian government, it will have either no franchise regulation or it will have regulation so weak as to be a ridiculous charade.