Part of selling any business is to talk about its good points,
how much income it makes and the benefits to any potential
purchaser. The problem comes when those benefits are oversold. With
selling a business as part of a franchise it is the same
as a recent article I published highlighted.
Under the new Franchising Code of Conduct, which commenced in
January 2015, Franchisors have new disclosure obligations and a
duty to act in good faith when dealing with Franchisees and
prospective Franchisees. In 2015, the ACCC is making it a priority
to crack down on breaches of the Franchising Code.
In a recent case in the Federal Court (you can
find all the details here) , in proceedings brought by the
ACCC, the Court found that South East Melbourne Cleaning Pty Ltd
(in liquidation) (formerly Coverall Cleaning Concepts South East
Melbourne Pty Ltd) as Franchisor had contravened both the
Australian Consumer Law, and the Franchising Code of Conduct.
The Court found that the Franchisor had engaged in misleading
and deceptive conduct, including overstating what potential income
two potential Franchisees might earn if they bought a Franchise
from the Company. They also misrepresented the systems the
Franchisor had in place under the Franchise to both collect
payments from customers and to pay Franchisees on time. In
addition, they failed to inform one of the Franchisees to obtain
independent legal advice.
The Court ordered a penalty of $500,000 against the Franchisor.
The Court also made orders against the sole Director personally. He
Required to pay a $30,000 penalty and
Disqualified from managing a corporation for two years.
The Court found that the director had used "unfair tactics
in his dealings" with the Franchisees.
The case serves as a warning both to Franchisors, their
Directors, and to potential Franchisees. For Franchisors, it is
essential that you comply with the Franchising Code of Conduct in
all dealings with your Franchisees and Potential Franchisees. For
Directors, it is evident that the Court is quite happy to order
penalties against a Director individually, even where there is a
company structure in place, if the Director is aware of, or is
engaging in conduct that is in breach of the Franchising Code. For
potential Franchisees, the warning is to carefully research any
potential Franchise purchase, including obtaining independent legal
and financial advice, as sometimes, what is being sold really is
too good to be true.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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