Franchise Churning
Franchising Crisis; Yes or No? asks John Farrell
Federal President of the NFIB
Franchising in Australia is Very Big business; it has also generated a cancerous growth of unscrupulous Franchisors who are effectively "stealing" the assets of small business families. These families are seduced into buying a franchise with little if any hope of survival within a year or two. It works something like this:-
The unscrupulous franchisor initially develops the franchise in a company-owned-operated store. Within this framework, the necessary expertise is developed and ALL the set-up and operating expenses are established. The franchisor then sets a franchising-fee and marketing-fee structure; these are applied to the franchisee contract and can be set in such a way so as to ensure that no profit is achieved based on the Sales volume that is projected. This sales volume is invariably and substantially less that the "predicted" volume declared in the mandatory DISCLOSURE document.
The major initial investment by the franchisee involves the "fit-out"; let's say, for example, that this amounts to $300,000, a typical figure. Now let's see what happens to this investment; it is normally a loan secured by the family home. Once the unprofitable franchise operation is in ongoing financial trouble, with a negative Profit Before Tax (PBT) result, the actual Negotiable Sale Value of the Business becomes zero. The lending institution that holds the property mortgage "moves" on the franchisee family and often the family home is sold. Marriage breakups and other personal traumas follow. The franchisor makes a "token" offering for the fit-out, say $30,000, knowing that the franchisee is financially desperate. The "bastardry" is now complete and the franchise is now available for "recycling". With minor dollars expended, the fit-out is dressed up for resale to the next wide-eyed small business family at, say, $250,000. It is clear that the profit margin on this recycled franchise is many times that of the franchise fees that are normally received, i.e. typically 8% of turnover or the equivalent in cost of goods purchased. So, provided that the unscrupulous franchisor keeps the percentage of recycled franchisees below the threshold of "suspicion", the franchisor gets away with the insidious plan, invariably stating that the exiting franchisee was a "BAD operator". This is an example of further deceit and is designed to keep the authorities, eg. the ACCC guessing. So what does the NFIB do?
It Protects the interests of Small Business.
“The NFIB promotes and protects the interests of Small business, and I mean SMALL”. It is a not-for-profit organisation but is NOT a charity. It expects its members to be competent business people and upgrade their skills in matters of business understanding and technology so that they become more efficient and profitable. In addition to professional guidance, efficiency will increase by proper understanding of the NFIB's business model that applies to their business, i.e. franchise, etc..
As government and big business downsize, small business must take over the role as the major employer of our young in gainful and interesting work, thus ensuring that they never see the dole while developing the excellent work ethic of most small business families. Franchisees are particularly vulnerable in many ways, as are contractors to Big business. Their personal assets are invariably used to secure loans entered into by the business. The value of the business at any point-in-time must therefore ensure that these personal assets are not placed in jeopardy.
With the International motto “we never give up and we never go away”, our members can be assured that our efforts in helping them to increase the REAL value of their businesses will be resolute and designed for the long haul.