Many years ago, an American attorney, Harold Brown, wrote a book called
– Trap for the Trusting”. We’ve borrowed Mr Brown’s title because it seems so relevant in
Australia’ current franchising debate.
Those familiar with
IF View know
we rarely write about franchising since it is only one of many marketing
channels for distributing goods and services. However, bearing in mind the current debate on the status of the
Franchising Code of Practice, it is appropriate for us to discuss the
About three years ago, the Department of Trade and
Industry, after consultation with many people involved in franchising,
decided that franchising was best regulated through a Franchising Code of
Conduct. This Code of Conduct
is strictly voluntary. The
average franchise buyer has no idea what compliance with the Code means. More particularly, all that franchisors appear to be required
to do is say that they are registered with the Code.
If franchisors breach the Code, they can be
“drummed out of the corps” but as yet, none have.
The result is that franchise buyers buy franchises from those who
purport to be abiding by the Code yet may, in fact, no be.
Another result is that franchising is given a legitimacy it does
not deserve. Today, most
companies complying with the Code are major corporations who can’t
afford not to comply. That
is, major corporations because of who they are, must behave ethically or
the unethical people get fired. Smaller
companies usually can’t afford to comply because their balance sheets
and operating statements are so bad that any franchise sale is nipped in
However, because the Code gives franchising some
legitimacy, people still buy franchises from smaller, dishonest companies,
and as a result, many franchisees lose their life savings.
The United States Federal Trade Commission has had
full disclosure laws for 15 years. These
laws and the “Uniform Franchising Offering Circular” (UFOC) disclosure
document, are supported by the International Franchise Association, the
World’s major franchisors’ trade body.
Market research carried out in the US some years ago indicated that
franchisors and potential franchisees favour franchise legislation using
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Why can’t Australian franchising be legislated for
and regulated as in the United States?
The UFOC is an inexpensive approach, it is effective because of the
high fines levied on those who don’t comply and it keeps people from
losing their assets to crooks or incompetents.
Since the introduction of the UFOC, American franchise fraud has
fallen significantly and franchising’s image has improved to the extent
that franchising now has a high level of respectability.
The argument put forth by those who favour the
Franchising Code is that people will learn more about franchising through
education. We find this
premise difficult to accept since, for example, police have difficulty in
educating people not to drink and drive.
We can only protect people from themselves by giving
them a legislative framework to provide information upon which they can
base sound financial decisions. As
well, all franchise companies, large or small, must be forced to provide
the same level of information.
Bearing in mind the cost of instituting the Federal
Government’s Franchise Code, it would probable have been cheaper to send
a group of Trade and Industry people to the United States to study the
Federal Trade Commission’s UFOC and to institute it here, word for word.
The system works. For those who question whether Australia should adopt
American legislation, it is worth noting that much of our Trade Practices
Act is based on the Robinson Patman and the Sherman Anti-Trust Acts of the
Some of the key areas covered by the Federal Trade
Commission’s Uniform Franchising Offering Circular are detailed below:
The disclosure statement must be provided to the
prospective franchisee at the earlier of either:
ten business days before
money is paid, or
at the first personal
meeting which occurs between the franchisor or the franchise broker and
the prospective franchisee.
The failure of a Franchisor or Franchise Broker to
comply with FTC Rule 436 could result in fines of up to $US10,000 per day.
The basic disclosure document consists of 20
categories of information. The
most relevant follow:
Identifying information about the franchisor.
Business experience of the franchisor and its directors and key
Description of the franchise.
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Money required to be paid by the franchisee to obtain or commence
the franchise operation.
Continuing expenses to the franchisee in operating the franchise
business that are payable in whole or in part to the franchisor or to a
person affiliated with the franchisor.
Material sufficient to substantiate the accuracy of the claim must
be in the franchisor’s possession at the time the claim is made.
A franchisor must possess the data upon which its earnings claim is
based at the time the representation is made.
This data can consist of, for example, market studies, statistical
analyses, franchisee profit and loss statements, as well as other types of
information which customarily are relied upon by prudent persons in the
course of making business decisions.
This material must be made available to prospective franchisees and
to the Federal Trade Commission or its staff upon reasonable notice. The franchisor must give notice of the availability of the
substantiating material in conjunction with any representation made.
In order to protect franchisees from unwarranted disclosure of
sensitive financial information the franchisors may delete any identifying
information from which the identity of the franchisee can be obtained by
the prospective franchisee. This
limitation, however, does not apply to disclosures made to the Commission.
A list of persons who are either the franchisor or any of its
affiliates, with whom the franchisee is required or advised to do
Real estate, services, supplies, products, inventories, signs,
fixtures or equipment which the franchisee is required to purchase, lease
or rent and a list of any persons from whom such transactions must be
Description of any franchisor assistance in financing the purchase
of a franchise.
Restrictions placed on a franchisee’s conduct of its business.
Required personal participation by the franchisee.
Franchisor’s right to select or approve a site for the franchise.
Training programs for the franchisee.
Franchising in Australia can only become credible if
franchisors are regulated and severely penalised if they break the law.
Self-regulation is a fairy tale.