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Ray Borradale's picture

Understanding economic interaction

Clark and Dawe are the most profound economic observers in Australia. They are the elite. Their interpretations of economic influences are sometimes questioned.

The Advantages of Worldwide Debt

I hope that clears up some of the confusion for those who distance themselves from any consideration of such forces. It is comforting to know that few are in a position to foreclose on those those who might foreclose on those who might foreclose on us. Or is a few too many.

Ray Borradale's picture

Wait for it

The Coalition wants to look again at franchising laws, while Labor wants no more changes for three to five years. So a Labor government might be more beneficial for franchisors, while the more numerous and smaller franchisees could fare better under a Coalition government.  Peter Switzer

A result from the Australian election is imminent. I’m not so sure the Coalition should want this gong.

Australians can be sure that whichever government takes power there is going to be little to rejoice about in the next term. The economic management of Australia is assured to be a constant struggle with a mish mash of political agendas thrown together in defacto marriages in both the House of Representatives and the Senate.

Australia’s next government will be one based on constant internal negotiation between often conflicting political ideologies bought together as the only means to win power. There will not be any semblance of a constant government direction based on a clear government mandate from voters and that is going to cost.

There may be some much needed gifts rolled out in some electorates but the grind toward balancing the national budget, paying debt, gaining surplus and energizing the economy is going to be subjected to remodelling of government priorities to satisfy promissory notes used to win independent and Green preferences.

Many pre-election promises will be out the window. At the end of the next term the majority of Australian voters can expect to be miserable and nasty. The next government and many individual political careers may end up in the wilderness indefinitely until the next massive screw up. Eventually conservative government will give some form of stability but the damage will be hell to overcome.

Australia is set to experience a huge acceleration in the cost of living for small Australians. It's already started. We now have little invested with our electricity suppliers. Our fuel intake is huge. We kill off our farmers. In a country where water is a constant problem in most regions Australia is now selling off its rights to our water to overseas investors. The costs of water, electricity, food and fuel are going to go through the roof.  A nervous minerals resourse sector will cost jobs if it is taxed into medicrity. Savings are going to evaporate and then you will have it. Franchising’s rogue operators will have gained their ultimate protection. Almost every bastard will be in the same sinking, stinking boat franchisees have been bailing out for 30 years.

But here is a list of the positives that will come from this election debacle.

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Banks might be keen to lend and confiscate.

?

There will be a surge in the number of independents that run at the next election and we might have another interesting outcome.

Ray Borradale's picture

A little Q contribution to Aus economy

The following happened long before Kleenmaid, Midas and various other franchises imploded. It happened long after and before thousands of franchisees imploded and that continues at a steady rate. A moving dollar may be healthy for an economy but sooner or later it has to produce a measurable benefit greater than its cost. But we don't want to know the cost.  We prefer to spin unknown level of benefit that justifies any cost including pretense regulation and social costs.

This has been a very good analysis of the Quiznos failure. However you've only scratched the surface of the extremely damaging incidents that continue to strip battlers of their homes and finances.  Inside Retailing

Robert W Sisyphus's picture

My 7 year-old grandson is

My 7 year-old grandson is staying over tonight with nanny. Noisy little fellow that speaks 2 languages at the same time -  English and jibba jabba. He came into my office and was telling me about Bonanza on the television. Apparently this bad man was selling parts of the Ponderosa that he didn’t own and foolish people had put up all their money.  Well; Ben Cartwright didn’t like them on his land and there was some jibba jabba and some shootin but in the end the villain was caught and then he abruptly met his end at the hands of another villain. Strange thing was that they was taking the fraudster to a Criminal court when justice was avoided. Gosh golly; haven’t we come a long way. Somehow my jibba jabba might relate to the economic influence that is today’s franchising.

Block your nose....

'If people are actively misled about information that's crucial to their expectation management, then that's a different matter, and we have laws to deal with that.'

Oh please....change the record. Let's see some cold hard stats on the number of franchisees that are financially able to withstand the legal onslaught that will more than likely see them spend more than what their business is worth, let alone what they may receive in damages or the personal toll.

Even if a franchisor openly admits to breaching the TPA/Franchising Code the franchisee is more often than not screwed. (Welcome to my world!)

I'll also bite here....and I do actually have a deal of experience in economics, and regrettably at the wrong end of the evils in franchising!

'So if your question is, "would unnecessary regulation cost the economy?", the answer is: almost certainly.'

I have a question on your reference to unnecessary regulation and it's cost to the economy. Wasn't it a gentleman by the name of Alan Grenspan that recently admitted he throught that banks would regulate themselves to the benefit of the economy? Fannie Mae and Feddie Mac did superbly well at regulating themselves! Regulation or lack there of, while sitting back allowing the greedy to bury their noses deeper into the trough was a large contributor to the GFC.

I would be happy to go on about why I also beleive the true cost of the GFC is yet to be seen, but let's get to franchising and it's contribution in Australia

I am sure there are some stats the FCA has buried in their vault of statistical trash that will suggest what the contribution of franchising is to Australian GDP. Now if someone would care to dig it up, it would be great if we could also find out how many franchisors that are so willing to throw stats around derive their income primarily from the sale of franchises. What is their true business model?

How many derive an income from being granted exemptions from 3rd line forcing and how much 'profit' is made from the sale and resale of franchises? How many franchisors open up their books to let franchisees see that before hand? Fact is they only present what will assist in a sale!

My question is what is the true contribution of the franchise industry?

How much emphasis is placed on the counterbalance of the wonderful reported success of franchisors and their systems, to the heaped misery of the broken and battered franchisees. Perhaps a hint with just a few issues - lost superannuation, lost homes, lost relationships, healthcare.....

A few answers along those lines will generate a more accurate picture of the contribution of franchising to the economy?

I would love to debate anybody at the FCA or anybody else that professes that a fine tune and crack down on franchising law would be detrimental to the economy. Where does open slather end?

Ray Borradale's picture

Franchising is clean enough

OK; I missed that part so I will bow to your sperior kaarnowledge. We have it - close down most of the discussion at BMM.

Ray Borradale's picture

Yep, positively maybe

It’s could either be a gent who recently went to the States and insulted audiences about their naivety on how much better Aussie franchising handled the ‘relationship’ and ‘franchisee expectations’ or an advocate franchisor enthusiastically ruptured in a wisdom born from xpurt’s preaching. The FCA luvs their spurts.

Not so sure he will be invited back to the States though. He can’t sing and he’s no David Reid or Brad Sugars or Rog Gillespie or …. any of our other talents.  I suppose it could be one of FCA’s other learned academics.  Does it matter?

I've read your stuff before

I've read your stuff before but I acn't place it. Ray, do you have any ideas??

I'm certainly no one famous,

I'm certainly no one famous, Close.

So

You don't see systemic problems in franchising. Whatever it is you're on then you should share it with the rest of us. I see Ray posts his name.

Well

Right, well, I guess I just disagree with your premise.

The question "would cleaning up franchising cost the economy?" relies on an assumption that franchising needs or would benefit from cleaning. I don't think it does or would.

Franchising is a terrific business model for those who understand what they're getting into. It's not a good business model for those who think they're going to "be their own boss", or make guaranteed returns, or whathaveyou. The 'problem' with franchising, if there is one, is not the business model or the regulation. It is a problem of expectations management.

And as I suggested earlier, nothing can be done about investors who make business decisions without properly managing their expectations. If people are actively misled about information that's crucial to their expectation management, then that's a different matter, and we have laws to deal with that. Outside of that kind of conduct, there is no place for regulatory involvement. Businesses succeed and fail all the time: that's life, and it is not in anyone's economic interests artificially to prop up businesses that would otherwise fail.

If there is nothing to be cleaned up, then any action to "clean up franchising" would be at best unnecessary, and at worst anti-competitive and debilitating for successful businesses. So if your question is, "would unnecessary regulation cost the economy?", the answer is: almost certainly.

Ray Borradale's picture

Maybe not a good choice

Hello Guest. On reflection that was a bad choice of term and it is impossible to disagree with much in your comment. 

It can be argued, and I would agree, that there is certainty in having no Code and no regulation. But that does not produce investor confidence and without what law and regulation does exist I would suggest the sector would collapse in time.  The industry needs a semblance of healthy remedy or franchise sales will eventually collapse. Franchising relies on more and more fleas being attracted to the dog.

While much of your comment distracts from the topic most agree that  we currently have is an illusion of available remedy. I did not suggest ‘replacing evidence-based reform with experimentation’ and definitely not relying on theory. After all; the FCA has itself proffered academic expert ‘theory’ that went against the evidence of the Inquiries. The evidence was in those Inquiries once you eliminate  those submissions that were clearly in self-interest and without regard to the health of the sector.

Uncertainty is a critical issue for all franchisee and franchisor investors who will one day want to realize their efforts. We now have growing uncertainty and that will continue with current regulation and legislation and the growing influence of that dastardly internet.

No one would suggest that there can be absolute certainty in any investment.  And neither did I.

The Code may be a dedicated framework but the evidence suggests it is not working. You only have to look at the denied and ignored franchise complaints of systemic abuse from a great many systems where they went on to collapse or their franchisee turnover can be nothing other than churning. A dedicated framework without access to remedy is not efficient and the efficiency of the sector will erode as the dirty reputation of franchising becomes more and more obvious.

The underlying premise of much of your comment relies on franchisees making bad decision sand therefore being responsible for the ills of franchising. I won’t insult anyone by answering to that nonsense other than to suggest that it is acknowledged that many franchisees should have made better decisions and were duped. And many signed into healthy models that evolved into hell.

The FCA has noisily argued against Code changes and Inquiries and whatever would minimize lucrative levels of conflict. But you are right that we have had far too many changes to the Code when it has been obvious that tinkering was always going to be a waste of time. To a large degree many blame the FCA for that. Had the legislators not been influenced by silky spin, and probably a beer or two, then they might have put something worthwhile into the Code 12 years ago.

Even Bernie Ripoll said he wanted to produce tougher recommendations at the conclusion of the Federal Inquiry but he felt the need to present what might get passed given the objections to previous inquiries/recommendations.

The South Australian [Franchising] Law caters for stupid arguments that a typo can cost $100k so let us not go there. If you argue that we cannot define explicit good faith then how is implied good faith of any use. FCA said 'implied' would do the job. Did they mislead the Committee?

The question was asked by the Inquiry Committee why anyone would take issue with the inclusion of ‘explicit good faith’ when franchisors and the FCA were quite happy with implied good faith. No one answered. One franchisor arguing against explicit good faith eventually admitted that its contract contained an explicit duty of good faith. It was not clear whether that duty applied to both parties or just the franchisee.

Good faith implied or explicit currently in the context of yor comment has the same effect on investor certainty.  

One Court sitting was able to define good faith to the point of finding against the franchisor recently;

In short, and relevantly, the franchisor is required to act reasonably and honestly (to an objective standard), not to act for an ulterior motive, to recognise and have regard to the legitimate interest of both parties in the enjoyment of the fruits of the contact, and to avoid rendering the franchisee’s interest under the agreement nugatory or worthless or seriously undermining it…

I did not suggest necessarily moving away from the Code. But give Australia a Code, or an Act, that enhances confidence by introducing serious deterrents and exposes those who would ignore the law.  Allow prospects to be better informed of which offerings come from identifiable shonks.

If the government is going to deliver education make it so that education gives a real insight into the serious level of risk and the varying complexity of historical bad behaviour. Or don’t bother.

What about that access to remedy held within the proposed SA legislation/ You never mentioned it. Should franchising continue to exclude franchisees from affordable remedy or allow the tactics and legislation that caters to the charade where the financiasl ability of the franchisee to compete is destroyed and default findings remain the status quo.

Uncertainty can make it more difficult to identify risks, and can make those risks seem disproportionately high.

Are you serious? Uncertainty comes from the sector's performance and that kills decision making and that is the outcome from the current standard required to operate in franchising.  ‘Disproportionately high’ insults the many thousands that have lost a substantial portion of, or total investment, and then gone on to suffer psychical, emotional and/or relationship trauma. Don't try post- franchising bankrupcty. Its a bummer.

An efficient framework should still cater to fools who insist on making bad decisions but it should at also deliver long term health to a very dangerous franchising industry.  What franchising is today will not last.

But the topic referred to was whether cleaning up franchising would cost the economy into the future as espoused by the FCA? I take it you think it will.

A test site?

Hello Ray. I find it kinda alarming that you should suggest Australia as a ‘test site’ for experimentation with franchising law. Particularly given you yourself have been so vocal about the destruction of livelihoods that has taken place in the franchising sector. I’m not suggesting that law reform should never be considered or undertaken, but the language of a ‘test site’ is unhelpful. Proposals for change should be carefully considered, based on theory and evidence. It’s probably not possible to eliminate uncertainty from any change to the rules of the game, but to suggest replacing evidence-based reform with experimentation is, as I said, alarming, when people’s livelihoods are on the line.

And I think ‘uncertainty’ would be most economists’ key point when talking about franchising regulation. Decision-making under uncertainty is difficult and can lead to inefficient outcomes. Franchising is better off than a lot of other sectors in this regard, because in the Code it has a dedicated legal framework governing its operation. Whether it’s effective or not is another matter. Just think how much the retail tenancy sector would love a dedicated enforceable code!

The presence of a code does much to reduce uncertainty, both by providing for certain rights in certain situations, and by making it clear where a party has no rights, so he can make his decisions accordingly. The Franchising Code has provisions that do both these things. But even if all the Code did was to give franchisors carte blanche to do as they pleased, this would at least be a certain basis on which franchisees and prospective franchisees could base their decision-making (the certain basis that they’ll get screwed if they don’t attend to their own interests).

Where franchising is perhaps not better off is in the constant changes to the Code, and in the constant call for further changes to the Code, which can only increase uncertainty. We’re now on our fifth version of the Code in a little over ten years – how can that be good for business certainty, other than for those in the business of providing legal advice to the sector?

And the nature of the changes being called for is also unhelpful for certainty. Huge penalties for a broad range of conduct (the SA proposal would put a penalty of up to $100k on making a typo in the disclosure document), a ‘good faith’ obligation which defies definition (any academic whose name doesn’t start with Z will tell you that ‘good faith’ has no settled context-neutral legal meaning), a Commissioner floating around dispensing the wisdom of Solomon to mystified franchisors … no one would know with any degree of certainty how the law would apply to them on any given day.

The nature of business decision-making is, to a large extent, identifying risks and acting accordingly. Uncertainty can make it more difficult to identify risks, and can make those risks seem disproportionately high. The law can help in this space, by improving certainty and reducing risk. But it’s in the ‘acting accordingly’ bit that the law is unavailing. People will continue to make dumb decisions that ignore or discount the risks associated with those decisions, and there’s nothing any government can do about it, unless you’d like to consider outlawing franchising altogether.

Ray Borradale's picture

Debate - go hard

I studied economics for a year and passed miserably since I was far too busy at the co-ed college next door and had to rely on argumentative analysis and common sense borrowed from my father. No one else is posting so I’ll give a backyard opinion and hopefully antagonize a few people.

Firstly, I see Australia as an ideal test site to once and forever decide whether franchising’s contribution to the economy would be retarded if the shonks were crunched. The US seemingly has a lot to deal with given the federal conflict with so many variations of state laws if it were to even be contemplated there. And besides, the US economy is far too fragile at this point in time.

Canada may be another country with a robust franchising sector big enough to give legitimacy to a result but I am unaware of the internal barriers if it considered any serious action. Europeans don’t seem to have much interest in franchising terrorists with complex interaction between countries with massive differences in history, economies and laws.

If Australia were to clean up it’s franchising sector I suspect that initially many small and new franchisor investors would be pushed out where historically anyone can start a franchise.  Most franchisors tend to begin with a clear vision of building to quality franchising and only once the power is realized is the power abused.

Overall competition however should not be reduced.  Quality franchise systems would grow and those franchisors would share the riches previously available to anyone who undertakes a small amount of reading and has the initial setup capital for anything perceived to be worth franchising.  And besides, independent operators are still franchising’s major competitor and they will march on until the day governments hand all small business to big business.

I suspect that the vast majority of franchise systems are dirty but many may not be that dirty that they cannot be retrieved. So we lose a few of the best contributors to the Franchise Council of Australia. So what?

Australia probably won’t take the step as FCA screams cataclysm where a downturn would mostly diminish lawyer revenue, FCA revenue and comfort, and of course reduce government regulation and victim support agency costs. If I were to hazard a guess, I suspect that political party and/or backdoor personal contributions to legislators might also take a hit.

I have always believed in the pure concept of franchising that once existed somewhere but today no one can remember exactly where. Personally I believe that if franchising were to be cleaned up its potential contribution would be far greater and with far less demands. But I suspect we will never know.

If the FCA are saying

If the FCA are saying franchising is too dirty to clean up then they can expect my resignation tomorrow. That does seem to be what they say and that won’t be good for my business.