No matter the size or popularity of a franchise, there are a number of reasons why a franchise can fail. Franchising your business can be an extremely reliable and effective method of growing your business. However, simply franchising your business does not guarantee success. The struggles of big-name Australian franchises such as Pizza Hut, Michels Patisserie and UFC Gym demonstrate these risks. As a franchisor, you need to understand where your predecessors have failed in order to avoid repeating their mistakes. This article will therefore go through a few key reasons why well-known franchises have failed. Also, this article will discuss what you should not do as a franchisor to ensure your franchise has the best chance at success.
Who and What Governs Franchises in Australia?
The Franchising Code of Conduct (Code) is a pivotal document when it comes to franchises in Australia. All Australian franchises must comply with the Code. The Code lays out the requirements that franchisors and franchisees need to meet. Failure to abide by the Code will likely result in your franchise’s failure. Likewise, your failure to meet the franchisor’s obligations under the Code, also likely will result in your franchise’s failure. Franchisors, under the Code, have key obligations that include:
- the duty to act in good faith; and
- providing the franchisee with the necessary disclosure documents at least 14 days before the franchisee signs the franchise agreement.
Importance of Complying With the Code
Compliance with the Code’s requirements is key to your success as a franchisor. More broadly, complying with the law is crucial to ensuring your success as a franchisor. The recent collapse of the UFC Gyms franchise illustrates the importance of complying with the Code and the law.
Despite UFC Gym’s global success, they recently went into voluntary administration. The UFC Gyms franchise went into voluntary admission shortly following the order they received from the Federal Court. The Court ordered the franchise to pay in excess of five million dollars in damages to three UFC Gym franchisees.
The court-imposed award was due to the UFC Gym franchisor’s misleading and deceptive conduct. The franchisor misrepresented the start-up costs necessary to set up the franchise. Further, the franchisor misrepresented the ease at which franchisees could break even and generate a profit.
Retail Food Group meanwhile had to pay over five million dollars to a significant number of franchisees. The Group failed to disclose to the franchisees the franchise stores were operating at a loss. Notably, the Group failed to disclose this information to the franchisees before they purchased the franchise stores. Michel’s Patisserie, on a similar note, had to pay out five million dollars as compensation for misuse of the marketing fund.
As a franchisor, these cases therefore highlight that you should always ensure that you are as open and transparent as possible with franchisees, particularly in pre-contractual negotiations. Lying about important financial details or even making overly ambitious projections without evidence to support them could be evidence of the misleading and deceptive conduct that cost UFC Gyms so dearly. In order to avoid making similar mistakes, you should always consult with expert franchising lawyers as to whether your franchise business is following the Code correctly and is not breaching any laws.
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1) Focusing on the Short Term
Another big risk for any franchisor is focusing too heavily on its own short-term profitability rather than the long-term health and growth of the network. As a franchisor, your franchise will only continue to thrive whilst your franchisees succeed. You should avoid depriving your franchisees of the chance to generate steady profits.
The UFC Gym franchise collapse demonstrates prioritising your own bottom line over your franchisees’ will only harm you in the long run. For instance, UFC Gyms forced its franchisees to buy equipment from suppliers connected to the franchisor. Their franchisees ended up paying as much as three times the actual value of the equipment whilst the franchisor pocketed the supplier rebates. Whilst using approved suppliers to ensure quality control throughout the network can be important and getting rebates from suppliers is far from uncommon, using connections with suppliers to profit at your franchisees’ expense is a surefire method to ensure that they won’t be able to stay afloat and in the long run this will only end up sinking your own franchise network.
2) Being Reluctant to Change
Along the same lines as being short-term oriented, another risk for franchisors is getting stuck in your ways and failing to adapt your business to meet changing market conditions. As a franchisor, your strength is your proven business model and its ability to be replicated by your franchisees but just because a business model is successful does not mean that it will continue to be so indefinitely. The risk of failing to innovate was highlighted by the fall of Pizza Hut. Unlike its main competitor Dominos, Pizza Hut failed to embrace technological developments in order to update its online interface and delivery services, meaning it was unable to offer the same level of speed and efficiency in delivering its products and was subsequently dethroned by Dominos.
3) Not Choosing the Right Franchisees
Whilst high-profile franchise failures may make the headlines, a surefire way to guarantee your franchise fails before it even gets started is by not selecting the right franchisees. The success of a franchise will depend on the long-term relationships between the franchisor and its franchisees. As a franchisor, you are trusting other people with your intellectual property and franchisees who fail to implement your systems and way of doing business can therefore do huge damage to your business’s reputation and goodwill.
As someone looking to expand your business by using franchising, it can be tempting to jump at any opportunity to add a new franchisee, but careful franchisee selection is crucial to a franchise’s durability. Always make sure to do your due diligence carefully before agreeing to let a franchisee join your network. Just because a person is passionate or eager does not mean they have the skills to run a business.
Alternatively, a skilled business person who likes to experiment and innovate may not be the right fit within the franchising business model. Making sure to get to know your prospective franchisee’s character and experience before granting them a franchise is, therefore, key to guaranteeing their compatibility with your franchise and the long-term success of your relationship.
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Key Takeaways
Growing your business can be hard. That is why some people prefer to establish a franchise system. However, you need to know that running a franchise is not always easy and success is not guaranteed, as many Australian franchises have shown us. Franchises can fail for a number of reasons, including:
- not complying with the Code and/or the law;
- the franchisor putting itself ahead of the success of the entire network;
- failure to innovate; and
- poor franchisee selection.
If you need help to understand how to give your franchise business the best chance at success, contact our experienced franchise lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
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