Franchisees call for action on “churning” and “good faith” in government’s franchise review

The National Franchisee Coalition has outlined its wish list for the federal government’s review of the Franchising Code of Conduct, including a specific definition of good faith and measures to combat the issue of “churning”.

The NFC, which was set up to support fair and ethical franchising, wants the notion of good faith to be incorporated into the code, which will undergo a review after submissions close next week.

According to NFC founder and chairman Peter Coventry, who is based in WA, the current code offers franchisees little protection from “rogue” franchisors.

“Without clear expression of the mutual obligation of good faith in the code, supported by robust and fair penalties for breaches, the code remains something of a toothless tiger that allows opportunistic franchisors to operate,” Coventry said in a statement.

“Good faith in franchising has never been anything more than addressing the power imbalance in the franchisee-franchisor relationship.”

According to the NFC, the review should address the following three issues:

1. Good faith

The NFC believes the code should incorporate a specific definition of “good faith” so that acting in good faith means acting fairly, honestly, reasonably and cooperatively.

The federal government chose not to include a good faith clause in its 2009 review of the code, but the 2013 review has left the possibility open.

While advocates say a good faith clause would ensure franchisors cannot act in a way that is detrimental to franchisees, the Franchise Council of Australia has argued such requirements are already implied in national law.

According to the NFC, the FCA’s resistance towards a good faith clause is “akin to opposing motherhood”.

2. Penalties

The need for penalties goes “hand in glove” with the need for penalties that deter poor franchisor behaviour and appropriately punish franchisors for opportunistic behaviour, the NFC said.

3. End of term arrangements

According to the NFC, end of term arrangements remain a contentious issue – one which has fuelled the practice of “churning” in the franchise industry.

Churning, as defined by the NFC, is where franchisors terminate a franchise agreement because of perceived breaches, or refuse to renew a franchise agreement, and then move to take over the franchise or on-sell it without paying for the goodwill, and pay little or nothing for the franchisee’s fixtures and equipment.

Where a franchisor declines to renew their franchise agreement and either takes over the business or sells it on to a third party, the NFC said the code should require franchisors to pay the departing franchisee the value of the goodwill developed by the non-renewed franchise, plus fair compensation for plant and equipment.

Earlier this week, a former Bakers Delight franchisee told StartupSmart how the company “stole” his business after his franchise agreement expired and he indicated a desire to go independent.

Coventry said the NFC’s proposed measures would “go a long way” to restoring the reputation of the franchise industry, and would make it safer and more attractive for people to invest.

“These issues should be addressed, and these recommendations adopted, because it will only result in better outcomes for both franchisees and franchisors,” he said.

“It will make both work harder for each other’s benefit, which is the ultimate win-win outcome.”

This article first appeared on StartupSmart.