Accusations of franchisor misconduct and fraud occurs in every country. Australia, for example, franchise churn is a big issue:
At the centre of these 30-plus claims is what is known as franchise churn. This is where a franchisor sells a site or territory that cannot turn a profit then sits back and waits for the business to fold.
The franchisor reclaims the site for a nominal price and resells it to another franchisee who inevitably fails a year or two down the track.
Each time the franchisee spends up to $450,000 buying what he or she believes is a viable business and ends up paying another agreed amount (usually about $50,000) to the franchisor for marketing fees.
Royalties and annual franchise fees, which range from 5-20 per cent of revenue, are owed on top of this.
Business failures are easily pinned on the franchisee.
“All you’ve got to do is follow the money trail. In the robbery stream, the franchisor virtually drives the franchisee to the wall to the point where they throw up their arms, leave behind them assets worth 10 times [what they are sold for in a fire sale] and so it goes on,” Farrell says.