The Vodafone case and the Post Office scandal have highlighted the suffering of small business owners who placed trust in large corporations and invested their life savings to later find themselves harshly penalised or unfairly treated by these corporations often resulting in lost livelihoods and significant distress.
After many petitions to MPs, once again parliament is revisiting the topic of introducing franchise legislation. Is this however the solution? And what are the benefits and disadvantages of doing so?
The case against franchise legislation
The UK remains one of the few countries around the world to treat franchise businesses the same as any other from a legal perspective. This means there are no additional requirements or laws that a business is required to comply with simply because it is a franchise. Franchise businesses across Europe, the US and Australia are in comparison governed by franchising legislation setting out requirements on disclosure and agreement registration.
This factor has often been cited as a key reason why the UK continues to be an attractive choice for overseas businesses to expand into and enables UK businesses to consider growth options without the barrier of extra costs and complexity to do so.
Further in the UK we have leading trade bodies that impose ethical standards on their members that align with the ethical standards in place across the rest of Europe. The British Franchise Association by way of example has a code of ethics that both its franchisor and franchisee members must adhere to and a mediation scheme to resolve disputes in a cost-effective way. The agreements that its members use must comply with their ethical standards which impose requirements on how they terminate agreements and deal with non-compliance that are fair and reasonable.
Some might therefore say that the industry polices itself and regulation is accordingly unnecessary and prohibitive.
The case for franchise legislation
Recent examples highlight how franchisors are escaping their ethical obligations (even if they were once members of ethical industry trade bodies) or incidents where it seems those obligations are not facing adequate scrutiny.
As a franchise enthusiast who has seen the benefits of the system for both long standing operators and growing businesses there is something to be said for imposing standards that apply to all operators (and not just those who choose to join ethical trade organisations) to ensure that the reputation of the sector and those businesses in it is maintained.
Should it, for example, be mandated that all franchise businesses are required to join an ethical trade body prior to launch and to actively adhere to their ethical code? In my view it should.
And what of legislation? Would having a mandatory disclosure document that is publicly registered and required to be supplied to prospects really make a difference? Potentially yes – it would mean only genuinely proven concepts with a strong track record could engage in franchising. It would highlight where the bodies are buried per se, and it might provide some of the checks and balances that are being circumvented presently. Is legislation the total solution though? In my view, no.
It relies upon that legislation having the backup of an enforcement authority to police effective compliance, and train and guide those in the industry on what those standards are. The British Franchise Association would have an ongoing role in doing this and could also be properly resourced to do so for the industry as a whole and not just its membership.
Yes, it would also mean potential barriers to franchise growth in the UK. The associated cost of compliance with bespoke franchise laws would be considerable, increasing the documentation to be prepared and its visibility and complexity – and yes, it would involve more legal intervention due to many contracts being subject to a body of implied terms. This may impact overseas growth potential and further stymie UK business growth plans at a time when UK businesses are already suffering. Something, however, needs to change and perhaps now is the time to do that.
Having franchise legislation would bring the UK into alignment with almost every other country in the world where franchise laws apply in addition to the usual laws applicable to all businesses. By placing the UK on the same footing as the rest of the world, the UK would be seen to be as rigorous in its protection of those taking franchises by ensuring quality and ethical franchising.
What would legislation look like?
Based on what other countries have implemented it would involve potentially extending existing laws that are in place to protect consumers and other considered vulnerable contracting parties to franchisees. It would require franchisors to demonstrate their franchise credentials, track record, and any potential franchise failures to prospects so that they enter franchises in full knowledge of what they are taking on. Whilst this will involve the collation and disclosure of information in a similar way as would be required in the due diligence/disclosure process when a business is sold, it can also serve as a useful marketing tool for those brands whose ethical credentials and track record are exemplary. In the UK members of the British Franchise Association are already required to have a disclosure document in place that is provided to prospects. It could also require overseas entrants to have a UK presence and at least to have tested the model in the UK (so that prospects know it is suitable for the UK environment before appointing others to grow the concept here). Franchise operators invest their life savings and livelihoods in taking franchises – checks and balances should be in place to protect them.
So, what next?
Whichever side you fall on, self-regulation or not, for those passionate about the industry the time has come to make some changes to the way it has always worked to place franchising in a better light, make it more attractive to potential prospects and prevent these isolated incidents that misrepresent the benefits of this thriving sector.
