Why franchisees need legal advice

As Inquiry gets underway.

The National Retail Association (NRA) is urging those contemplating on becoming a franchisee to first invest in independent financial and legal advice.

“It is absolutely non-negotiable,” NRA CEO, Dominique Lamb said. “We know that franchisees operating under unscrupulous franchisors are effectively powerless when it comes to franchisor abuse, and will suffer tremendous financial losses as a result.”

The Federal Government’s Parliamentary Franchising Inquiry is now underway with findings due at the end of September.  The Inquiry is concentrating on how the Franchisee Code of Conduct is being operated, its effectiveness, dispute resolution, termination rights, unfair contract terms, reporting obligations and disclosure of information.

On the opening day of the Parliamentary Inquiry hearings, HWL Ebsworth special counsel, Derek Sutherland said that government could not legislate to protect people from their own poor conduct when they signed up to be franchisees.

“They’re not taking enough interest at the time when it matters, to really get some advice and make an informed decision,” he said.

NRA CEO, Dominique Lamb

Sutherland told the Inquiry that while franchise agreements clearly state that small business owners should get financial and legal advice before entering an agreement, in practice, many didn’t, because they didn’t want to spend the money.

According to Lamb, franchisees can also suffer simply from poor business management franchisors and while the intent may be honorable, poor business practices such as over-borrowing, over-spending, expanding too quickly, clumsy internal system and inconsistent agreements between the franchisees network or inadequate back end support can lead to problems for everyone.

“But what happens when there is an unscrupulous franchisee who thinks that Australia’s Industrial Relations framework does not apply to them, and the first a franchisor hears about it is via the media? When franchisees are exposed for systematically and intentionally exploiting workers, it’s inevitable the franchisor’s reputation ends up suffering,” she said.

It can also infect the entire store network as consumers protest with their feet. They can and will boycott an entire chain based on the misdeeds of a few, and this is a significant risk for everyone involved.

“It’s just as important for franchisors to do their own due diligence on who they welcome into their store network.”

What has emerged over recent times is that despite the scandals, the franchise system is still working incredibly well for a great many people, and has done for half a century, however when things go wrong, it’s usually through business mismanagement. And that can be on both sides of the fence.

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