Franchises

Reporter: Laticia Gibson

It's meant to be the low-risk way of having your own business... investing in someone else's established success story by buying an exclusive territory. But for some, it's a fast-track to financial ruin.

"They sell you a dream that you will go in, they will give you all the support. I bought into the dream but it wasn't what I was expecting at all" says Deanne. For more than 2 years, Deanne Deleeuw and her husband Mark have been embroiled in a David and Goliath battle with the world's largest bakery franchise, Bakers Delight. "We are nearly $1.4 million in debt. But when we went into this we were nearly $2 million in assets before we even met Bakers Delight - so how does this happen?" On the verge of bankruptcy, the couple have launched a counter-attack and are suing the franchise giant, alleging Bakers Delight was responsible for the demise of their 3 stores on the NSW south Coast.

"The financial difficulties started when I bought the Shell Harbour store. The store was not profitable but Bakers Delight promised me support and that my business consultant would work very closely with me to turn this store around to reach its full potential" says Deanne. But it never did, it never even got close. Despite running two profitable stores, less than one year after purchasing the third, Deanne's agreements for all three were terminated. "To me it showed that the conduct was intentional, they were waiting for Shell Harbour to drag my other twos stores and myself down."

Convinced the downfall of her stores was not her fault, Deanne pushed on. Trying numerous avenues to have her case heard, all to no avail, until she approached her Member of Parliament, Joanne Gash. Since then Mrs Gash has had 13 other Baker Delight franchisees call her begging for her help. Only now has the Australian Competition and Consumer Commission launched an investigation."I felt very much for the families. I could see their health deteriorating; I could see that the businesses gone, their livelihood everything that they invested in this business had started to go" says Mrs Gash. Other franchises are also under the spotlight. 5 people claim to have lost over $180,000 on James Homes services Franchises, alleging that the middle-man who sold the franchises, engaged in providing:

  • Inaccurate disclosures
  • Promised unachievable income targets
  • And reduced sales regions.

John Farrell, from the National Federation of Independent Business, believes this is an epidemic. That up to one in five franchisees are in some kind of trouble. "This is not conspiracy theory - it's common sense. That a certain number will be allowed, encouraged, to go broke." Realistically though, why would a franchisor deliberately sabotage his own product? "Well it's just a matter of money. As you can see by simply recycling or churning 10% of this franchise, he will double his profit - simple as that" answers John Farrell.

The theory on how churning works is simple. A franchisor creates financial hardship to a point where the franchisee is forced into liquidation. It then takes back the goods and the business - on sells it, and in the process, can double its money. "I don't think you can ever say that it's all one party's fault or the other party's fault." Bakers Delight Chief financial officer, Richard Taylor, denies any unconscionable conduct and was quick to pass judgment on failed stores.

"In the situation where a franchise business fails, it is a very distressing situation for the franchisees. I don't think we're responsible for those particular situations" says Richard. Is it the fault of the franchisee then when a store fails?

"In most situations we find franchisee failure is due the failure of the franchisee to manage their financial affairs or to comply to the franchise agreement" answers Richard. "Churning is a term used by uneducated people who have got no idea about the franchising sector" says Richard Evans.

Surprisingly, the industry peak body, the Franchise Council of Australia, represents both sides of the fence - the franchisor and the franchisee. Its CEO, Richard Evans, says there is no problem, despite 1 in 3 franchisors being involved in substantial disputes. He says it's up to the investors to do their own homework and enter at their own risk.

"They're required to seek advice from a legal practitioner, accounting or consultant - they're required to do that. They get over 250 disclosure items about the company they are about to enter - someone going into a company must be fully aware of the risk involved" adds Richard.

John Farrell is outraged by the industry's denial and buck passing, claiming franchisees are sitting ducks. "Those items have got nothing to do with the franchisee, that's why the franchisee pays fees, royalties and marketing fees for heaven's sake." The question here is, are the laws really protecting the franchisees? Since changes to the Trade Practices Act 9 years ago, the ACCC has made 15 prosecutions. The industry is further under the microscope with the Federal Government currently reviewing and making changes to the Code Conduct to boost disclosure. John Farrell isn't resting, he's leading the charge in retribution, investigating avenues for class action for Deanne Deleeuw and around 50 other franchisees.

Contact Details

John Farrell

Website: http://www.nfib.com.au/

Email: john.farrell@can.nfib.com.au
Phone: 0407 105 466
Address: PO Box 303 , Civic Square ACT 2608

Franchise Association of Australia

Website: http://www.faai.com.au/

Address: PO Box 2254, Strawberry Hills, NSW, 2012

Phone: 02 9319 5125

Fax: 02 9319 5124