Franchising is a $170 billion industry sector in Australia – but it seems much of the money is being made by the franchisors who own the brands rather than the franchisees who operate the businesses.

For many, it represents a way to throw off the shackles of office life and own a business with some of the risks of a start-up removed. You get a brand, an exclusive geographic market and help with set up and sales.

But an ongoing stream of hardship cases have hit the headlines in recent months, covering some of Australia’s best known brands from Red Rooster, Oporto, Pie Face, spa group Endota and the list goes on.

The brands might be different, but the pattern is the same. Costs and conditions imposed on franchisees from head office combined with crippling rents and interest payments have destroyed the savings and livelihoods of many ordinary Australians, who simply wanted to run their own business and provide for their families.

This week, franchising is the focus of evidence before the Royal Commission into the banking industry, and as former Competition Commission Alan Fels said, we should prepare ourselves for the opening of “a can of worms.”

On Tuesday, the Royal Commission heard the case of a former Pie Face franchisee, Marion Messih, who says she and her family lost everything on a franchise they operated in Werribee in Melbourne.

They paid $330,000 for the franchise and the family trio each expected to make $50,000 a year, but “if we earned $500 a week it would be a miracle.”

In the case of the Messih family, it was the bank which cruelled their business when they garnished funds from the sale of an investment property to recover their entire debt.

“I worked hard to get where I was,” Ms Messih told the Royal Commission. “I should be retired now but I still owe money.”

The Royal Commission revelations are separate to those coming out of a Senate inquiry into the Franchising Code of Conduct which was launched after reports of issues at chains such as 7 Eleven, Caltex, and Domino’s Pizza.

Earlier this month, that enquiry heard from owners of Red Rooster, Oporto and Chicken Treats stores who claimed they were being pushed into bankruptcy by high costs and operating restrictions.

Their submission also complained about the costs of a loyalty scheme and home delivery service, both of which had added to costs without recouping revenue.

After a weight of complaints, the Federal Government created a Franchising Mediation Officer to resolve complaints with reference to the Franchising Code of Conduct, which is administered by the Australian Competition and Consumer Commission.

The Mediation Officer can mediate between franchisors and franchisees, has a dispute resolution service and offers legal advice.

Some say this is not enough, and there are growing calls to establish a Franchising Court where grievances can not only be mediated, but penalties and compensation can be ordered.

Curb Your Enthusiasm.

Think about the old saying that if something is too good to be true, then it probably is.

Its an adage which applies to many of the promises made to franchisees who buy into an established brand only to find they have invested in a flawed business model, and one balanced in favour of head office.

Here are five things to consider when running your ruler over a franchised business.

  • Does the franchisor have any competing brands which might create a conflict of interest? Red Rooster franchisees say they are not able to sell flavours and sauces with their chicken because that competes with Oporto, which is owned by the same company.
  • Location: the Messih family Pie Face business located at Werribee Plaza. Major renovations were begun to the centre’s carparks soon after the took over. “People avoided Werribee Plaza with a passion,” Ms Messih said. Another submission to the Senate committee from the franchisee of an Endota spa told of how the centre where she was located renovated and became a “construction zone” which turned away customers.
  • Who pays for what? Red Rooster franchisees claim they have paid $25,000 each for a loyalty scheme, a “direct hit” which was introduced without disclosure. The operator of the Endota spa claimed head office was directly selling man gift vouchers, which they were bound to honour but with left them without a profit.
  • What are you locked in for? Some franchisors insist that franchisees buy food and equipment from them which can be sourced cheaper elsewhere. While this bumps up profits at head office, it cuts profits in the store. According to a Senate committee submission, one franchisor is selling cartons of Mt Franklin water to franchisees for $18 each, while they can be purchased at the IGA for $11. Where is that money going?
  • Where are your marketing dollars going? Franchisees routinely pay fees to head office for advertising campaigns, and yet some claim that head office has been doing very little to nothing to market the brand. Could there be greater transparency on how this money is being spent, and could its impact be measured?