Franchises need carrots as well as sticks

This week the great and the good of franchising were all in Canberra for the National Franchise Convention which finished up yesterday with the presentation of SmartCompany’s Franchise Innovation Award.

The sector is booming at the moment with the latest Franchising Australia 2012 research showing the number of franchises operating in Australia has increased 15% in the last two years to 1,180 franchise businesses.

However, with the increasing size of the sector comes increased awareness of some of the potential pitfalls of franchising.

Last week SmartCompany reported on the disgruntled franchisees of Bean Bar who claim they are owed money by Basset Holdings, the former owner of the Bean Bar coffee chain which has collapsed into liquidation. There was also the collapse in August of Pets Paradise, with warnings of difficult times ahead for the pet store’s franchisees.

Unfortunately, rogue franchisors do exist and give the Australian franchising sector a bad name.

They undermine confidence in the franchising sector by failing to adhere to industry best practice and ignoring the Franchising Code of Conduct.

At the heart of the problem lies the lack of financial penalties attached to the code.

This week the Australian Competition and Consumer Commission called for financial penalties to address persistent breaches of the Franchising Code of Conduct. A move towards financial penalties is a step in the right direction as it at least gives some bite to the Franchising Code of Conduct, which will penalise rogue franchisors and franchisees while acting as a deterrent to others.

Yet at the same time as calling for harsher penalties there needs to be real action toward educating franchisors and franchisees in best practice before entering into and during a franchise relationship.

Pre-entry education for franchisees and franchisors would help avoid many of the problems the ACCC has identified.

Besides the big stick, there needs to be a carrot of measures designed to improve franchisees’ knowledge and business skills prior to buying a franchise, as well as improving franchisors’ understanding of best practice in developing and maintaining business models that are profitable for themselves and their franchisees.

For regular updates and insights on the franchising sector, make sure to read franchise expert Jason Gehrke’s SmartCompany blog.