Changes to Australian franchise regulations were announced yesterday by Australian Federal Minister for Small Business Dr Craig Emerson.

The reforms to the Franchising Code of Conduct aim to create greater transparency and disclosure, while not restricting the operation of business, and are the most significant changes to the legislation since its introduction in 1998.

Based on recommendations of the expert panel, Dr Emerson will not ban unilateral contract variations or unforseen capital expenditure.

The panel’s report outlines there may be legitimate commercial reasons for such changes, which could increase competitiveness and value of a franchisee’s business, and ensure the continuing strength of a franchise brand.

Greater transparency and disclosure

Instead, the reforms focus on better educating prospective franchisees about the franchise and what to expect.

This includes outlining possible changes which may occur, prior to the signing of a franchise agreement.

Franchisors need to disclose whether unilateral contract variations or capital expenditure is likely to occur and give examples of where it has occurred in the past three years.

Franchisors also need to outline the requirements to meet legal costs and confidentiality restrictions.

To assist franchisee understanding the reforms also include the introduction of a voluntary plain English document to accompany the disclosure document, prepared by the franchisor, outlining the costs, benefits and risks of the franchise.

The panel also recommended better education for prospective franchisees. (The Centre has created a Franchising and Small Business Course for franchisees and prospective franchisees, and is also investigating further education options to assist the sector).

Reducing franchise conflict

These reforms should create lower levels of conflict, or at least significant conflict in franchise businesses as franchisees won’t be able to say they didn’t know and they’ll be better prepared of what to expect when entering and exiting a franchise.

It’s the Minister’s aim that both franchisor and franchisee will enter franchise agreements with their ‘eyes wide open’.

Enhancing the Trade Practices Act

The reforms also include enhancements to the Trade Practices Act in the area of unconscionable conduct.

Unconscionable conduct will apply from before an agreement is signed throughout the terms and length of the agreement, and any breaches will result in fines up to $1.1 million for a corporation or $220,000 for an individual.

While the reforms stop short of defining acts of unconscionable conduct, principles will be developed by the Australian Competition and Consumer Commission to better help the Courts interpret the law.

End-of-term arrangements

Franchisors are also now required to advise franchisees whether or not they will be offered a franchise agreement renewal six months out from the end of the existing franchise agreement.

It will be interesting to see the impact of this change, particularly where a renewal is not offered.

Sale of a Franchise

Franchisors must also outline, before the signing of a franchise agreement, the process for the sale of the business.

This includes whether the franchisor will have first right of refusal, how the value of the business will be determined, who owns the equipment and fit-out, etc.

Impact of Franchise Reforms

These changes should have a positive impact on new franchise agreements and franchisees entering the sector, or renewing their franchise agreements for another term.

However, the changes only apply to agreements signed after the date changes are introduced, which is yet to be determined as the changes need to be drafted and passed through parliament before coming into effect.

This provides no extra protection for current franchisees, and with the average franchise agreement term in Australia of five years, it could be some years before the full benefits of these changes come into effect.

And as they say, the devil is in the detail, so we may need to wait to see the real implications once the reforms are drafted and passed through parliament.

Future franchise reforms

Dr Emerson said the changes would be given at least three to five years to operate before being reviewed, in order to provide sufficient time to evaluate their effectiveness and provide some stability to the sector.

However, longer may be required to see the full effect if the average franchise term is five years and the reforms only apply to agreements signed after the legislation comes into effect.

While there will be some preliminary trends which emerge in this time, the end-of-term arrangements in particular are likely to require a longer review period to be accurately assessed.

It will also be important to assess issues arising after the legislation’s introduction, based on when the franchise agreement was signed, particularly in any research activities.

Being a researcher I will be keen to see how the sector progresses in light of these new regulatory changes.