ECONOMIC AND FINANCE COMMITTEE Page 138 668 Mr RAU:  Mr Beddall, I have a couple of quick questions, and the first relates to the proposal you floated about review of the franchise agreements. Do you think that there is perhaps an easier option available in terms of having what amounts to a standard form prescribed franchise agreement  that  contains  certain  core  elements  that  are  immutable  and  become  the  basis  of  all franchise  agreements,  and  then  there  is  some  scope  for  variations  that  are  not  inconsistent  with those  immutable  basic  requirements,  which  can  tailor  the  particular  agreement  to  the  particular franchise? The Hon. D.P. BEDDALL:  Certainly that is an option, and we do not rule anything out. We are just saying, 'This is our starting point. Let's have a discussion about it.' We think that it has been a long time in Australia since there has been a discussion on franchising, and that is why we welcome your inquiry, and a similar inquiry has just taken place in Western Australia. We  think  that  that  is  the  case,  but  the  problem  with  any  of  that  is  that,  if  the material is misleading, the only recourse a franchisee has is to law and, by the time a  franchisee is in  a  position  where  they  need  recourse  to  law,  they  usually  have  no  money,  and  there  are  a number of instances of that. I was president of the predecessor to this organisation, which got into dispute with a franchisor who sued the organisation and bankrupted CEO because they had some enormous amounts of money. That is what happens to individual franchisees in some franchises. We make the point that not all franchisors operate in a predatory manner. We often quote  what  is  probably  the  best  franchise  system  in  Australia,  and  probably  the  world— that is, McDonald's. One of my directors is a previous McDonald's franchisee. If you look at the McDonald's model, it gives all the information. If you buy a McDonald's franchise, you know exactly what money you will make from your turnover. If you are not making that return, they put their own people in to help you reach that return. Unfortunately, that is not the case across all franchises. 669 Mr RAU:  My second question is in relation to a lot of evidence we have received concerning what happens at the end of the franchise period and the difficulties that exist in relation to  renewal  or  re-issue  of  the  franchise.  I  am  wondering  whether  you  and  your  organisation  are  in favour  something  along  the  lines  of  the  right  to  negotiate  being  explicitly  granted  by  law  (and  I assume  that  it  would  have  to  be  a  federal  law)  to  a  franchisee  that  would  in  effect  say  (assuming that they had been otherwise compliant with the terms and conditions of the franchise agreement up to the point of the expiration of the agreement) that they should least have a right to negotiate in good faith with the franchisor for an extension or a continuation of the agreement. The Hon. D.P. BEDDALL:  We think that that is absolutely essential. We also have a view that most franchise agreements in Australia are too short. Prior to coming to this meeting, I went through the latest issue of the Franchise Magazine.  If you look at that, the average term of a franchise  is  about  five  years.  The  average  cost  of  a  franchise  is  probably  $250  and  more,  which means  that  the  franchisee  has  to  return  $50,000  a  year  profit  just  pay  off  the  capital  investment. Most people do not take that into account. They do not amortise the cost of the franchise over the period to see whether it is profitable, and that is when they get into a lot of trouble. Again,  to  use  McDonald's,  I  think  theirs  is  10  or  15  years.  At  the  end  of  that process,  the  franchisee  has  the  right  to  the  capital  gain.  As  I  indicated,  one  of  my  directors just recently  sold  two  McDonald's  franchises.  His  franchise  agreement  has  expired,  but  he  got  the capital gain in selling those franchises. That does not happen in very many cases. We think that it is  a  very  good  provision  because  the  person  who  is the franchisee has obviously put in years of work  to  build  it  up.  If  you  have  a  short  term,  such  as  five  years,  with  a  large  capital  cost,  you  will never recoup the capital investment. 670 Mr RAU:  My last question is: obviously, we are committee of the state parliament, and much of the regulatory framework is within the constitutional power of the commonwealth and not  the  state.  Do  you  have  any  views  on  areas  in  which  the  state  legislatures  can  make  useful contributions,  aside  from  writing  letters  or  making  recommendations  to  be,  hopefully,  taken  up  by our colleagues in Canberra? The Hon. D.P. BEDDALL:  I think that there are two things that can be done. When I started this process as a minister way back in the early nineties, we brought in a voluntary code to see  whether  a  voluntary  code  would  meet  all  the  requirements.  Eighteen  years  later  we  do  not think  that  that  has  been  done  properly.  There  is  a  way  that  state  governments  could  play  a  role, and that is through their consumer affairs departments or small business departments, where any franchise sold in the state needs to be registered. It does not have to be onerous. It just means that