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Gerry Harvey

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For over a decade, franchising has been a bullet performer industry, but for some – a small minority – the impact on their lives has been like a gun to their head. Problems in franchising, just like any business, can come from many directions, but at the end of the day, I subscribe to the maxim ‘let the buyer beware’.

Mind you, as small business editor for The Australian for more than a decade, I have been petitioning federal governments to create a franchising ombudsman with the power to convene – consumer claims-style tribunals – so the honest facts of a battle between franchisor and franchisee could be aired openly.

Politicians’ resolve to protect franchisees or maybe it has been over-cautious, penny-pinching, boss’ butt protecting public servants could it explain, but no one wants to ride to help franchisees.

On the flipside, some franchisors also need protection from dud franchisees, who complain about the franchise when in fact the failure of the business could be put down to a dud franchisee.

Of course, franchisors generally have more resources and can pay for legal ruffians to bounce troublesome franchisees who then, if they are wily, run to the media. But there are only a small number of franchisees who win this way.

Gerry Harvey recognised the flaw within franchising and innovated the model so he did not charge anyone for a franchise – he gave it to them. But it meant that if they didn’t measure up – according to the franchisor – he could take it back and replace them.

Harvey had one big advantage over many franchisors — he didn’t need the money. Most franchisors use the money to grow the outlets across the country and even the world, but it means that many get in the business of simply flogging franchises. That’s when the problems can set in.

I have found franchisors don’t see critical mass as others do and have an overwhelming belief that more and more of their coffee shops, juice bars, newsagencies, furniture shops and car service outlets can be sold. Many are deluded.

I have a long list of franchisors who are experiencing troubles with franchisees. My guess is the causes of these disputes range from ordinary franchisee business people to over-flogged franchises, poor site selection by franchisors, tyrannical shopping centre management, new competitors and even a crooked franchisor.

John Farrell, who heads up the National Federation of Independent Business in Canberra, is crusading for small businesses battling bigger businesses and has at least one franchisor in his sights.

He calls it the battle of Hillsdale versus Hillsong, with a Gloria Jeans franchisee from Sydney’s Hillsdale in dispute with the franchisors, who are very religious men and members of the evangelistic Hillsong church.

This is a media frenzy waiting to happen and it shouldn’t be that way. The franchising industry has a mediation process, but if one party goes into it in an adversarial way, then it fails and it ends up filling the pockets of lawyers. Alternatively, the franchisee folds up and it often gets flogged to someone else and the story can go on and on.

Recently, the federal government made some valuable changes to make franchising safer, but the dispute process remains a concern.

In 2006, the franchising sector grew by nearly 13 per cent, with 960 franchise systems. And franchisors have been operating their businesses for an average of 16 years and franchising them for 10 years.

A Griffith University’s Franchising Australia 2006 survey showed the franchising sector turned over an estimated $128bn – or 14 per cent of the country’s GDP. This is up from 10 per cent of GDP in the 2004 survey.

The survey also found most disputes involved two franchisees within a particular franchise, with the proportion of franchisees in dispute with franchisors across Australia equating to less than 4 per cent.

That’s great news, but some franchises have no disputes and others have lots because there is something wrong. We can live with a second best solution, but if franchising is so important, why shouldn’t it have the very best?

Published on: Monday, June 29, 2009

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