Oz Churning “Debate”

August 12, 2008

Jason Gehrke writes a weblog called Franchise tips and trends in http://www.smartcompany.com.au. His latest article, Churning: The dark side of franchising, is predictable.

I tried to submit a comment but was unable.

Here is what I would have submitted:

First the industry experts said “There is no churning.” Second, they say, “Well, yes, there is but…There’s just a few bad apples.” And, now, they add: Proving how bad a franchisor abuses their franchisees is difficult anyway (so why bother?).

Who are Australian small business investors going to believe: Franchise experts who keep changing their stories or returning foot soldiers from the franchise front? I have every confidence that people recognize BS when they see it.

1. Churning is a cluster of franchisor behaviors that results in financial catastrophe for the investor. These exercises of discretion within the incomplete contract are perfectly observable, auditable and quantifiable.

How often the abuse happens is irrelevant. Every franchisee knows what happens when you step out of line. Crucifixion was a very effective behavior modification technique.

2. There are no “good” systems or “bad” brands. The ability for franchisors to exercise their discretion in an abuse way (opportunism) arises from the very heart of the relationship. In franchising, the franchisee owns the majority of the store’s assets but the franchisor controls them. It is its great strength and its great source of abuse (it’s someone else’s money).

Attributing intentions (Oops sorry to cut your head off, there buddy. Does it ease your pain that I, admit, am an idiot?) means less than nothing. A family’s bankruptcy forms do not list someone else’s intentions.

3. To say that it is difficult to prove predatory business practices is a misrepresentation.

In Ontario, Canada, Gillian K. Hadfield presented a very simple rule to determine if a franchisor’s behavior was opportunistic: Would the decision in question have been made IF the franchisor HAD owned the franchisee’s assets THEMSELVES? If no, then the franchisor likely abused their dominant contract and economic position.

Example: Would the franchisor voluntarily pay the same price for the products that they FORCE their franchisees to buy from head office? Yes or no. Would they buy or shop around and get better value from another source of supplies? Is the contract being used to squeeze a hidden franchise tax from captured investors? Same thing with head leases, equipment purchases, renewals, etc.

Big Franchising wants everyone to stay asleep and they have a +30 years Oz history of saying anything to maintain their dominance. Get Smart.

Franchising is Unsafe at any Brand.

Les Stewart MBA
Midhurst Canada
lesstewart.wordpress.com


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