A recommendation from the national Franchise Inquiry (released on December 1) to introduce an annual registration process for franchisors could create a reliable source of information to determine the true number of franchise systems in Australia. Over time, an analysis of ongoing registrations could also provide valuable data about the rate at which new franchisors are created, as well as the rate at which franchisors exit franchising. This could provide useful information as the basis for further research in the sector and identify issues affecting franchisor survival.

Registration recommendation could highlight franchisor survival data

A recommendation from the national Franchise Inquiry (released on December 1) to introduce an annual registration process for franchisors is not without merit. Such a registration requirement would create, for the first time, a “definitive” list of Australian franchisors. This is not to downplay the importance of the research conducted biannually by Griffith University with its Franchising Australia surveys – indeed the two would complement each other very well.

As thorough and academically robust as it is, the research conducted by Griffith University relies on an assimilation of information from a myriad of sources to determine the overall number of franchisors operating in the Australian market. Businesses that advertise for franchisees in Australian magazines and newspapers, as well as in online franchise directories are uncovered by the Griffith researchers to reveal the number of franchisors known to be operating based on those advertising generally at the time the advertisements are being monitored.

By comparison, a centralised registration system requires ongoing action on behalf of franchisors (and their advisors) to ensure that the business to be franchise is listed. While the recommendation arising from the franchise inquiry remains just that – a recommendation – the practicality of and details of such a scheme (if adopted) are yet to be determined.

The wording of the recommendation is as follows:

4.91 The committee recommends that the government investigate the benefits of developing a simple online registration system for Australian franchisors, requiring them on an annual basis to lodge a statement confirming the nature and extent of their franchising network and providing a guarantee that they are meeting their obligations under the Franchising Code of Conduct and the Trade Practices Act 1974.

By proposing an online registration service that involves lodging a statement, the recommendation avoids going so far as requiring franchisors to provide their franchise agreements and disclosure documents as part of any registration process. Submissions to the inquiry variously encouraged franchisor registration, but cautioned against any registration process that provided any kind of implied or actual endorsement of a franchisor. Logistically, this would have been difficult if not unworkable for any organisation charged with such a responsibility. According to the latest Griffith research there are approximately 1,100 franchisors in Australia, all of which are now obliged to complete the annual update to their disclosure documents by October 31 each year. No registering body could be expected to review and check such a volume of information in order for it to be considered “current” or “correct” by 1 November.

The self-registration online idea does not require franchise agreements and disclosure documents to be checked or vetted by a government agency – something which might otherwise raise concerns about the ongoing confidentiality of commercial sensitivity of the information potentially contained within the documents. In this regard, the system of registration proposed is not likely to provide information that a potential franchisee could not otherwise obtain for themselves, but for the first time in Australian franchising it should result in a reasonably accurate list of franchisors active in the sector.

Of course those businesses that fall under the four-point definition of a franchise under the
Franchising Code of Conduct but which do not consider themselves to be a franchise are not likely to register. This means that franchises that call themselves “distributorships” or “licensed business opportunities” or something other than franchises may continue to draw investors while not providing cooling-off periods, disclosure documents, and the other requirements of the Code.

But if online registration is introduced, at the least the franchise sector would know how many franchisors are in operation, and perhaps a little about the size and extent of their operations, which would provide useful statistical information (further reinforced by another inquiry recommendation that the Australian Bureau of Statistics take a closer look at franchising in future surveys).

More importantly, over time an online registration service would provide an insight into the rate of new franchisor creation in Australia, and presumably, if organisations fail to renew their registrations, the rate at which franchisors cease to franchise.

This could be particularly interesting as part of a potential future study on the rates and causes of franchisor failure. While the collapse of the 165-store Kleins chain drew considerable attention earlier this year, the rate at which franchisors discontinue franchising or cease business altogether is unknown. Such data could be useful to prospective franchisees in developing their risk assessment of the system in which they are considering investing.

There are of course a number of other recommendations arising from the franchise inquiry. It is not the purpose or intention of this column to explore every one of them, however the proposal of registration, and the subsequent statistical information potentially available – particularly in relation to franchisor entries and exits – could be highly valuable. I have written about the issue of franchisor exits (including failure) previously, and conducted preliminary research into Australian franchisor survival rates over a 10-year period which was used in the Franchise Advisory Centre’s own submission to the Inquiry. If this Inquiry recommendation is accepted and well-managed, it could provide extremely useful and relevant information to the franchise sector as a whole.

Jason Gehrke is a director of the Franchise Advisory Centre and has been involved in franchising for 18 years at franchisee, franchisor and advisor level. He provides consulting services to both franchisors and franchisees, and conducts franchise education programs throughout Australia. He has been awarded for his franchise achievements, and publishes Franchise News & Events, Australia’s only fortnightly electronic news bulletin on franchising issues. In his spare time, Jason is a passionate collector of military antiques.

Copyright © Jason Gehrke, 2008.