Franchise industry challenged by new disclosure laws

New disclosure laws for the franchise industry came into effect on Monday.

Most franchise industry observers are saying that the amendments to the code do little more than codify best practice that the best franchise operators were following anyway.

But Jason Gehrke, director of franchise consultancy Franchise Advisory Centre, says that many franchise chains will have to do some extra work to comply.

Two of the most controversial changes include:

1. The new obligation to disclose to potential franchisees the contact details of former franchisees.
2. The obligation to disclose to prospective franchisees a list of suppliers that pay to franchisors a rebate for goods purchased by franchisees.

Luke Baylis, co-founder of healthy fast food franchise Sumo Salad, says his chain is embracing the changes because he encourages prospective franchisees to contact previous franchisees.

“We encourage franchisees to do as much due diligence as possible, because it’s a long partnership. They benefit with all the information. People are more committed if they have done thorough research.”

But Baylis believes other chains are finding the transition tougher. “Businesses that have had litigation issues or a bad rapport with exiting franchisees, and people who are taking rebates that don’t benefit the franchise system, and are on the high side. It’s a negative for them.”

He says there is disquiet in the industry generally about the changes, but it the long term they will be a good thing.

“There’s a lot of negative push back now. But people will look harder at franchises and have more information about franchising, and do better. When everyone embraces it, it will be better for everyone involved. It encourages franchisors to have the highest corporate governance, which is what the industry needs anyway.”

Gehrke says he is recommending his clients to set up an alumni association for past franchisees. “It’s now as important to retain the relationship with franchisees after the end of the franchise agreement as it is before the agreement is entered, because past franchisees can have an impact on the success of the franchise.”