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Converting a
Licensed business to a Franchise and what to expect
As a
consultant to the industry for many years, it has never ceased to
astonish me the lengths that some organisations go to in order to
avoid being labeled as a franchise. So, firstly I will
examine the possible reasons for this having occurred and,
secondly, look at some of the expected outcomes of a managed change
from one structure to a Franchise structure.
This is all
the more surprising when the Franchising Code of Conduct has
absolutely nothing contained within it that any morally sound, best
practice business would not wish to adhere to. The Code is
wrapped around a practical common sense commercial approach to
doing business. Robert Gardini was the solicitor charged by
the Government with investigating the introduction of a legislated
version of the FAANZ voluntary code. In the late 90’s he
consulted Bill Borowski (my late and sorely missed partner) and
myself and advised us we were amongst the minority of advocates for
the Code’s introduction. We thought it actually wasn’t tough
enough, and I still hold that view.
If the Code
is relatively tame, why then is my practice involved with so many
Companies, large and small, Public and Private, who openly declare
“We are not a franchise”?
In the
majority of cases the reasons for trying to avoid the Code
are:-
a.
Historical – Trying to avoid the hassles:
In 1998, or
just prior to the introduction of the new legislation, the Company
may sought legal advice about the potential impact of the Code upon
their business. I will be decidedly unpopular for the next
statement, but I believe many Lawyers at this time were generally
scaremongering and saw the new Code as a chance to drum up
business. Resistance to change and fear of the unknown were
influencing factors also. As a consequence, some fairly
complex and sometimes unnecessary structuring took place.
These structures have in later years served to hold back the
client’s growth rather than enhancing it. The co-operative
structures that remain as an example are cumbersome dinosaurs that
have so many heads they self mutilate themselves to
destruction!
b.
Monetary – Trying to avoid the costs:
There was a
genuine fear, and somewhat founded, that the creation of all the
necessary documentation and reporting procedures would place a
heavy burden on existing Franchisors. There was some
investment required at the time, but the resultant self business
analysis and the benefits and efficiencies which emerged as a
result, far outweighed any costs incurred.
c.
Entrepreneur versus Unscrupulous Operators. Trying to
skirt the law:
There was
also a fear that the establishment expenses would prevent
entrepreneurial entry to the franchise market, making new
franchises too expensive to establish. What we have seen
happen is that the true entrepreneur continues to find the way to
market, but the “make a quick buck and run” guys have been excluded
from the franchise community. Hooray to
that!
Due largely
to the efforts of the FCA, the ACCC, and the franchise community
itself, “Franchising” is definitely not tarred with the same brush
that it was ten years ago. It is no longer a stigma to be
labeled as a franchise – on the contrary, all the statistics now
point to the success of this business phenomenon, and to be a
franchise is now clearly perceived as an advantage if the business
is under scrutiny.
Given this
new label, many companies have now sought advice as they no longer
fear being stamped as a franchise, and upon examination (often by
in house Counsel) have made the realization that under the Code “We
are in truth already a franchise; we had better make some changes
so that if we are examined by the authorities, we come up trumps”.
Failing to comply with the Franchising Code of Conduct
can be a breach of the Trade Practices Act and the fines are
horrendous.
The
definition of franchising, so often published, is very broad, but
concise. Specifically, if in the business model;
1
There is a written, oral or implied agreement,
2
The supply of goods and or services is under a system
or
marketing
plan,
3
Trade is substantially associated with a trade mark, advertising or
commercial symbol,
4.
The Franchisee pays a fee, directly or indirectly,
Then you are
a franchise – like it or not!
So, you bite
the bullet; decide to comply with the Code, thereby avoiding the
potential wrath of the ACCC; what do you need to do and what will
be the outcomes??
Firstly, get
good accounting, legal and commercial advice. Big companies
have the luxury of outsourcing the necessary expertise but
recognise the need to do so. Small companies sometimes
struggle to see the value in outsourcing and prefer the “do it
themselves” approach. In the long run, this frequently results in a
more expensive exercise as the time factor in discussing and
implementing change is grossly underestimated. Also the lack
of experience leads to tasks having to be constantly redefined and
repeated. There is no substitute for specialist advice.
Allow me to
paint a common picture:
You have 50
Licensees who some years ago signed a fairly innocuous agreement
and life has been ticking along fairly amicably ever since.
The Licensees haven’t given you much grief; their businesses
haven’t performed spectacularly well because they are all so
diverse and different. Especially the guys in Qld and WA,
“because it’s different here and you don’t understand”. You
now declare that they will be furnished with a new agreement – ten
times longer, far more complex and we’re all going to adhere to the
system. Even worse – we will become a
franchise.
o
Fear of the unknown kicks in and the rumour grapevine starts to
rapidly grow as if fueled by speculation.
o
The major expectation is thus a simple one.
o
No matter how prepared you are, no matter what little actual
commercial changes will really occur, no matter how well you
explain all the benefits; you will have an attrition
rate.
o
The common response is “I’m not going to sign that bloody
thing”.
o
If you allow it to, this stone can gather all the moss and you run
the risk of a complete mutiny and system meltdown.
o
Be prepared to conduct the road-train education
programme.
o
It must focus on the advantages of the new structure.
The top
executives, not just the Franchise Support Manager, must visit each
state personally and, present a logical case as to why this move is
necessary, together with the benefits of doing so. The
benefits to the Licensees themselves that is! They should,
but don’t actually, care too much about the finances of the
Franchisor.
At least the
stance can be taken by the converting Company that, we as
Licensor’s, are not the bad guys; we’ve taken advice, we are in
fact structured as a franchise, and as a consequence we need to
make these changes to comply with the law. We have no choice
but we want to work with you and help you through this process with
as little disruption to your business as possible.
The franchise
presentation is then best followed up in the next few days with
face to face personal meetings to allay fears and explain the
misunderstandings.
Despite these
costly efforts, our experience is that somewhere between 10% and
20% attrition rate is predictable.
If a Licensee
wants out as a result, our best advice is to let them go as quickly
and inexpensively as possible. Restrictive covenants may exist in
the written agreements, but they are hard to enforce and trying to
enforce them will deflect your attention from the main game plan.
Within reason, set the Licensee free. As a Franchisor,
you may choose to not offer a franchise to certain individuals
whose profile does not suit the new growth path. This is fine
if they want to leave, but if they want to stay you must be
prepared to continue the relationship and try not to disadvantage
the Licensees against the new Franchisees. A tricky
relationship which may take years to work through until the licence
agreements expire.
It has been
our observation that to start a Franchise Advisory Council as soon
as possible and work with the influential Licensees to bring about
the shift to franchising is of major benefit.
Conversion
from licensing to franchising is certainly fraught with problems
and difficulties. It is a time consuming and frustrating
period, BUT this is a fantastic opportunity to rebrand and or
reinvigorate a stale system. Clear out the dead wood
legitimately and take the business to the next step. After
all, if you stay as you are now the future is clear – you will
fester and die. The future is franchising.
Phil
Blain
Franchise
Alliance
Victoria,
July 2005
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