As the CEO of one of Australia’s largest franchise groups, Jim Penman has a unique perspective on the state of the franchising industry and the need for reform.
Jim shared his thoughts on the current franchising code and what he believes needs to be done to better protect franchisees.
The Franchising Code: A Flawed System
According to Jim, the current franchising code in Australia is “completely and utterly pathetic” and “almost completely useless” when it comes to protecting franchisees from being taken advantage of.
He cites numerous examples of franchisees being “ripped off” by unscrupulous franchisors, with “horrifying stories” of franchisees losing significant sums of money.
Jim believes the key issues with the franchising code include:
- Lack of Franchise Expertise Among Lawyers: Jim says that most lawyers do not have the necessary expertise in franchising contracts to properly advise franchisees. He recounts a case where a franchisee’s lawyer advised them not to sign a contract, even though Jim considered it to be one of the fairest franchise contracts around.
- Incomprehensible Disclosure Documents: Jim argues that the disclosure documents franchisees are required to read are “dense, legalistic twaddle” that is “incomprehensible” to the vast majority of prospective franchisees. He believes these documents are actually a boon for “scumbag franchisors” who can bury unfavorable terms in the fine print.
- Lack of Franchisee Protections: Jim is critical of the lack of meaningful protections for franchisees within the code, stating that it “allows and even encourages bad behavior” from franchisors. He cites examples of franchisees being forced to sell products at a loss or pay exorbitant prices for supplies.
A Better Way: Franchisee Surveys and Transparency
Jim believes there is a more effective way to protect franchisees and promote good behavior from franchisors – through the use of annual franchisee surveys.
Every year, Penman’s Jim’s Group surveys its 5,500 franchisees anonymously, asking simple questions about their satisfaction with the franchisor’s support, communication, and the profitability of their franchise.
Jim says this system has been “very powerful in pushing down bad behavior and reinforcing good behavior” among their franchisors.
Jim suggests that if this model was adopted across the franchising industry, it could provide much-needed transparency and accountability.
He envisions a publicly available website where the survey results for all franchise systems would be listed, allowing prospective franchisees to make informed decisions.
“Fundamentally, if we can’t get a good result on a survey like that, then we don’t deserve to be in business,” Jim states.
Protecting All Franchisees, Regardless of Investment
Jim believes the need for reform extends beyond just the larger, more expensive franchise systems.
He argues that even franchisees investing $25,000 to $300,000 in a franchise are often just as unsophisticated as those investing millions.
Jim believes the government has a responsibility to protect all franchisees, not just the “hyper-educated elite” who can afford high-priced legal counsel.
He advocates for a system that works for everyone, regardless of the size of their investment.
The Lack of a Franchisee Lobby
One of the key challenges Jim identifies is the lack of a strong franchisee lobby group that can advocate for their interests.
He notes that the existing Australian Franchise Association is “good people” who “try and do good things,” but they “don’t have much of a voice” or financial resources.
In contrast, Jim believes the franchise industry is dominated by the influence of “big companies” and “greedy, incompetent” franchisors who have the resources to lobby the government and shape the regulatory environment to their advantage.
“I cannot comprehend why every time I go up before these inquiries and say why they should do these things, why they should do simple things that protect ordinary Australian investors, why they just ignore it completely,” Jim laments.
A Call to Action for Franchisees and Lawmakers
Jim’s message to prospective franchisees is clear: do your research, talk to as many current franchisees as possible, and be wary of franchisors who are unwilling to provide that information upfront.
“It’s incomprehensible to me how somebody can spend even $25,000, $30,000 on a business without spending 2 hours on doing research,” he says.
But Jim also believes franchisees need to be more proactive in advocating for change.
He encourages them to write to their members of parliament and demand better protections.
“Let’s have some protection for franchisees and let’s not worry completely and only about the lawyers in the top end of town,” Jim urges.
As for lawmakers, Jim believes they need to take a much more active role in reforming the franchising code to prioritize the interests of small business owners over the influence of big corporations and the legal/financial services industry.
“It’s about time the government stepped in to protect people,” Penman says.
“And if I’m saying this, and I’m the biggest franchisor in the country, and this is fair, this is reasonable, then why aren’t they doing it?“
Jim Penman’s candid assessment of the franchising industry in Australia paints a concerning picture – one where the current regulatory framework is failing to protect the interests of franchisees, even as the industry continues to grow.
Jim’s proposed solutions, centered around transparent franchisee surveys and a greater emphasis on franchisee protections, offer a potential path forward.
However, realizing this vision will require a concerted effort from both franchisees and lawmakers to challenge the status quo and demand meaningful reform.
As Jim says, the time has come for the government to step in and ensure that the franchising code truly works for everyone, not just the “greedy capitalists” at the top.
It remains to be seen whether Australia’s political leaders will heed this call and take action to support the lifeblood of the country’s economy – its small business owners.
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