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  • #998738
    James Millar
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    There has been quite a bit of discussion here lately regarding pre-business advice and whether that advice is objective, overly positive or overly negative. The franchise inquiry is set to produce some interesting insight. Opening comments today….

    Can’t legislate against stupidity’

    Mr Sutherland said government could not legislate to protect people from their own “stupidity” or conduct when they signed up to become franchisees.

    “They’re just not taking enough interest at the time when it matters, to really get some advice and make an informed decision,” Mr Sutherland said.

    I’m not saying they’re stupid, I’m just saying they’re not taking advantage at the right time, when the decision-making is at the most important.”

    https://www.theage.com.au/business/companies/can-t-legislate-against-stupidity-franchise-inquiry-told-20180608-p4zkal.html

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1215807
    bb1
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    JamesMillar, post: 260124, member: 5318 wrote:
    Can’t legislate against stupidity’

    Mr Sutherland said government could not legislate to protect people from their own “stupidity” or conduct when they signed up to become franchisees.

    Love it, but as soon as a business (franchise or any other) fails who gets the blame, the government.

    #1215808
    James Millar
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    bb1, post: 260125, member: 53375 wrote:
    Love it, but as soon as a business (franchise or any other) fails who gets the blame, the government.

    We discussed this in the office today. The problem with regulating to protect the lowest common denominator (people with no idea) is that the bar will end up so low that the system will be unworkable. This would be like lowering the speed limit to 10 kph because some can’t reverse out of their driveway without crashing (google it – very funny).

    The current franchise code and other commercial law protection is already relatively robust. Sure there is probably some questionable franchisor sales material out there but they are wide open to litigation for misleading representations if their forecasts were poorly constructed. And franchisee litigation can turn into a well funded class action very quickly.

    This sounds completely self serving but there is a case to say that some small businesses should require sign off that they have received appropriate accounting and legal advice before they start a new business (or before they buy a franchise). There are already some instances where these types of sign offs are required. The problem with this (as Bert will no doubt confirm) is that there are plenty of ordinary accountants and lawyers that may add little to no value. Just more cost.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1215809
    DavidChin
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    I agree with your points.

    JamesMillar, post: 260126, member: 5318 wrote:
    there is a case to say that some small businesses should require sign off that they have received appropriate accounting and legal advice before they start a new business (or before they buy a franchise).

    To clarify, the Code does require franchisors to obtain a signed statement from the prospective franchisee (ie, all, big or small) that the franchisee has been given advice by an independent lawyer, accountant or business advisor. However, it is not as stringent as requiring both legal and financial advice (eg, mortgage guarantees).

    When advising on franchise agreements, I also highly recommend getting financial advice given how important P&Ls, cashflow, planning etc are to survive and prosper.

    #1215810
    bb1
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    DavidChin, post: 260127, member: 81210 wrote:
    I
    To clarify, the Code does require franchisors to obtain a signed statement from the prospective franchisee (ie, all, big or small) that the franchisee has been given advice by an independent lawyer, accountant or business advisor. .

    True, but unless things have changed dramatically it was purely a statement of me saying that I had asked for advise. It didn’t mean that I had actually asked for or obtained advise. And for all we know that advise could have been about if it was going to rain today rather then the merits of the franchise. (PS it is raining at the moment)

    Why I loved the statement above was that I once used stupid in one of my posts on here and was condemned for it. But half of the people coming on here for advise are just ”stupid”, they get some excellent advise (positive and negative), and ignore it. Then when you go check their website a few months later it’s gone, defunct, disappeared.

    We are often given a hard time for giving negative advise (or is that advice), but that is what people often need to bring out the positive points of what they are seeking to achieve. And thats why people don’t want to go see and accountant or lawyer, because their ”dream” may actually just be a mid life crisis, which will turn into a life crisis..

    Anyhow back to my lawn bowls while having a good laugh about the opening statement, hope you keep posting more James..

    #1215811
    Paul – FS Concierge
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    I read with horror about the people that have lost everything.

    Any set of rules will have smart cookies workout how to walk up to the very line that the rule allows but not cross it. Of course some cross it too but that is what the courts are for.

    I an ideal world, system owners would make decisions that created more profit for the franchisee which in turn would create more derivative income for the system owner – a classic win/win.

    The current rules allow for all of the imbalances that we read about, often resulting in a franchiser wins/franchisee loses structure.

    That is, there might be a robust set of rules, but they do not do a very good job in creating a balanced win/win system.

    It occurs to me that further protections can be put in place for the prospective buyer and current franchisees.

    A few I can think of:

    • Before sale report on the number of franchises “handed back” to the franchiser.
    • Before sale report on the franchises for sale across the system + the number of franchises “handed back” vs the number of franchises in the system (excluding those that are for sale but have never had an owner/fitout etc)
    • Before sale report on the median number of hours worked in the franchise by owner + husband/wife/family etc.
    • The franchiser must sell ingredients for the same (lowest) price they sell to supermarkets or other outlets.
      The franchiser can not make rules around buying from the franchiser for common products obtainable elsewhere cheaper eg, flour, milk etc.
    • Before sale the franchiser must disclose the reported profitability of a site for the previous 5 years (using ATO figures).
    • The franchiser must disclose the median reported profitability of all sites across the system or brand by brand for the previous 5 years (using ATO figures).
    • A huge one here – that a franchiser must make up the difference and allow for a set profitability rate for the franchisee, between an advertised special price and the actual price to sell that special eg, If the franchiser thinks a special price is in order to sell Item A at $1.00 when it cost the franchisee $3.00 to sell ,and add a 10% margin so $3,30, the franchiser pays the $2.30 to make the franchisee whole.
    • The franchiser must report the median fitout/rebranding costs to franchisees over the previous 10 years, that at cost finance rates must be supplied to undergo same and that caps vs profit ratios be put in place to protect the franchisee.
    • That rules be put in place with first options and at cost finance rates around exclusive territories/new sites being created or that compensation be made to existing franchisees where new sites have opened close by and the profitability of the existing franchisee has declined as a result.
    • That a profitability test be put in place and arbitrated by an independent body where major decisions are made affecting the system, In essence, it would decide, does this make the franchisee more profitable or less profitable.
    • Banning system owners from requiring franchisees to purchase non-system related products and services where they can be had cheaper elsewhere eg, insurance phones etc.
    • Setting reasonable cost caps on charging for system required software.
    • Allowing for purchase and private finance (instead of perpetual lease at rates set by the system owner) of equipment needed to operate a franchise.

    This is just off the top of my head – I am sure there is a lot more that can be done to re-balance the current structure,

    And most of it is pure fantasy – it will never happen.

    But I still like rooting for the day that the small guy gets to play on an even field with the big guy ;-)

    In the meantime, I take [USER=5318]@JamesMillar[/USER] ‘s advice very seriously – get good advice from a great Accountant and Lawyer before signing anything if you are considering buying a franchise.

    #1215812
    James Millar
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    There are some great points you have listed Paul and no doubt they would add some extra protection. At the same time (and before we make new law) we must remember that no one is forcing these franchisees into investing and signing up to the prescriptive rules within a franchise group. Your due diligence items listed above are the type of questions (and many more) that must be answered before someone invests.

    So the question is….Why are so many people signing up to these systems and handing over significant amounts of money before they have all of the answers? I think its because they don’t know what questions to ask in the first place. Why don’t they know which questions to ask? Because they don’t get good advice and many (most) lack the capacity to undertake their own due diligence. Who’s fault is that? Caveat emptor

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1215813
    Paul – FS Concierge
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    [USER=5318]@JamesMillar[/USER] Sage advice to me from a good friend of mine when I was considering what business to buy – “Take the P&L’s with a grain of salt Paul, – don’t buy anything without seeing the actual bank accounts”.

    Shortly before that I time I had to make company wide decisions based on over 80 sets of P&L’s so I (somewhat) knew my way around them – I knew enough to be able to spot the signs to look for that things seemed “off”.

    This put me way ahead of the average buyer.

    And that said, I am still learning the financial ropes many years later and understand I have nowhere near the knowledge or savvy as a good Accountant.

    But I will never forget the advice given to me by my friend and think that it is a tragic step for prospective buyers to put down money without first seeking professional advice.

    #1215814
    bb1
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    JamesMillar, post: 260132, member: 5318 wrote:
    There are some great points you have listed Paul and no doubt they would add some extra protection. At the same time (and before we make new law) we must remember that no one is forcing these franchisees into investing and signing up to the prescriptive rules within a franchise group. Your due diligence items listed above are the type of questions (and many more) that must be answered before someone invests.

    Exactly, why is it every time that someone gets into trouble the expectation is that the Government has to step in and protect them. Take your own responsibility

    JamesMillar, post: 260132, member: 5318 wrote:
    So the question is….Why are so many people signing up to these systems and handing over significant amounts of money before they have all of the answers? I think its because they don’t know what questions to ask in the first place. Why don’t they know which questions to ask? Because they don’t get good advice and many (most) lack the capacity to undertake their own due diligence. Who’s fault is that? Caveat emptor

    I agree but also add a few more reasons why people are ”stupid”(I can say that now)

    * They want to live the dream of being their own boss, by doing the home work they will quickly realise this is not possible for everyone, so if I don’t investigate the dream will become a reality.

    * Forums and sites like this, where everyone is spruiking the dream and saying how easy the dream is. Where the people actually providing solid advise to say that the dream may not be possible for everyone are quickly shutdown, or told how they should write their responses. I can sight many example on this forum alone where FS encourages people to think the dream is simple, whereas in reality they should be spruiking that the dream is possible but there are many pitfalls and it is not for everyone.

    #1215815
    Paul – FS Concierge
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    [USER=53375]@bb1[/USER] – Flying Solo is a Forum ie, a place for people to express their own opinion.

    The nature of a strong Forum is to encourage different ideas in the hope that having different points of view, especially those arising from different experiences and expertise members have, leads to a better, stronger, more thoughtful conversation.

    So to use the forum name in the context you have is just wrong.

    “FS encourages people to think the dream is simple…”

    If it is your view that some members here express views you do not agree with, no problem at all – your dissenting opinion is encouraged and valued.

    The weight of your arguments will speak for themselves.

    Please, just do not use the term FS or Flying Solo, or any other derivative in such a loose way. Because Flying Solo, as an organisation does not hold the view that, “FS encourages people to think the dream is simple…”.

    As a representative of Flying Solo, my characterisation of the internal discussions we have about business would be much closer to:

    There are amazing opportunities for Soloists to create wonderful businesses.

    And business is hard. Many try and fail.

    Do a lot of research, seek great advice, ask opinions of others, have plans and fallback positions,….and so it goes on.

    And come back on to Flying Solo and share your story, become a contributor, help others on their journeys.

    It should also be said that having any platform, Flying Solo included, be a vehicle only for “group thought” would sound the death knell for diversity.

    And just a little bit about characterisations – Our Golden Rule is to Be Nice and Be Respectful. As a rule of thumb, we wouldn’t be happy with the over use of the word Stupid. By it’s very nature, the word is a characterisation, not a fact. It’s use in this thread is contextual ie, it comes from the news article linked to.

    #1215816
    James Millar
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    I’ll bet some of these broke franchisees regret having only listened to those telling them what they wanted to hear before they started.

    Paul in defence of Bert’s comment I think it can be hard to strike a balance in the one single thread or section of the forum. It’s almost like a section titled “The Lions Den” etc would be appropriate for completely objective opinions and advice (still free from any personal criticism). If people were to post in that section they know the stakes will be a little higher and they are not going to get sugar coated support. Handled correctly, talking about failure or potential failure is very important. People learn from it. Accountants plan for it (we try and consider tax loss recovery against other income and asset protection etc). Maybe a section about failure “Post your fail stories” would provide some more balance.

    Helping build better businesses and better lives with expert financial and taxation advice. [email protected] www.360partners.com.au 03 9005 4900
    #1215817
    Peter – FS Administrator
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    Hi James,

    Very thought provoking post as usual James, and very interesting discussion as well.

    I don’t think there is any way to legislate against stupidity or naivety, so there always has and always will always be people who go into business or franchises without asking the right questions, not getting the right advice and/or not listening to advice. And even with all that some people won’t be able to make it work for various reasons.

    ‘Caveat emptor’ is the bottom line for sure in my opinion… but having said that, regulation can and does help to protect more powerful/knowledgeable parties from taking advantage of this imbalance, and give people protection/support if they have been deceived.

    As you say it possibly does this to a fair extent already. Will be interesting to see what the inquiry finds in terms of any recommendations for changes.

    Cheers, Peter

    #1215818
    Peter – FS Administrator
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    JamesMillar, post: 260137, member: 5318 wrote:
    Paul in defence of Bert’s comment I think it can be hard to strike a balance in the one single thread or section of the forum. It’s almost like a section titled “The Lions Den” etc would be appropriate for completely objective opinions and advice (still free from any personal criticism). If people were to post in that section they know the stakes will be a little higher and they are not going to get sugar coated support. Handled correctly, taking about failure or potential failure is very important. People learn from it. Accountants plan for it (we try and consider tax loss recovery against other income and asset protection etc). Maybe a section about failure “Post your fail stories” would provide some more balance.

    Hi James and Bert,

    In terms of the Flying Solo element of the discussion… I agree it really can be hard – particularly in writing – to strike the right balance when giving honest and negative feedback (i.e. what people may not want to hear), but I think it’s possible to deliver harsh truths in a respectful way without personal criticism. Constructive v destructive.

    Our goal is most definitely to welcome and encourage robust debate and contrary opinions. Our Tell me straight forums also further invite this with a caution at the top ‘if the community likes what you’re doing they’ll tell you. The opposite is also true, so be brave!

    While some opinions and experiences will more positive than others, I think we can all agree that starting and running a business is hard work, risky, fraught with uncertainty, takes a long time, will lead to mistakes, not for everyone and is not for the feint hearted … its anything but simple and easy! But as we’ve seen over the years the dream is possible and a lived reality for hundreds of thousands of people in Australia.

    I also agree that sharing experiences of failure, of which we all have along the way, is a great way to learn and hope.

    Getting good advice. Listening to said advice. Not seeking shortcuts. Research. Hard work. Feedback. Patience. More research. Testing. Failing. Getting better. Repeat.

    The path is similar I’m sure for most of us, so the more support and encouragement and frank feedback we can give each other the better!
    Peter

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