Assisted by Kristina Tato
Each year, the ACCC receives around four hundred complaints about franchising, and inadequate disclosure by franchisors is consistently one of the top two Franchising Code issues that is being reported. Recently, the ACCC released a Disclosure practices in food franchising report, following it, undertaking targeted compliance checks on twelve different franchisors in the food services sector, due to concerns that prospective franchisees were not being provided with adequate disclosure.
In order for the prospective franchisee to make a reasonably informed decision, the franchisee must be provided with information regarding the franchise prior to entering into a franchise agreement, as per the Franchising Code of Conduct. The disclosure document must be provided to the prospective franchisee at least fourteen days before entering the franchise agreement.
Information that must be provided to a prospective franchisee includes:
- operation costs;
- end-of-term arrangements;
- details of existing franchisees;
- any intellectual property that is material to the franchise system;
- any supply restrictions; and
- any other relevant information.
Several issues were bought to light in the ACCC Report relating to disclosure which appear to impede on the franchisee's ability to conduct thorough and proper due diligence before entering the franchise agreement.
In summary, the ACCC Report found:
- Franchisors were making it difficult for former franchisees to be contacted with 8 out of the 12 franchisors failing to provide contact details of former franchisees and only 4 of the 12 franchisors were consistently providing email addresses and mobile numbers of former franchisees.
- Franchisors were providing inadequate disclosure of the type of goods subject to supply restrictions with 7 out of the 12 franchisors failing to properly disclose what goods were subject to supply restrictions.
- Almost all of the Franchisors imposed supply restrictions and did not directly share rebate benefits with their franchisees and could set maximum retail prices. Although these are generally legal, these factors combined can impact on the ability of a franchisee to generate a profit.
- Franchisors were not disclosing ongoing costs such as rent, labour costs and inventory. A third of the 12 franchisors failed to adequately disclose rent, inventory and costs of property. Where the costs are known or reasonably foreseeable, the franchisor must disclose them.
- Franchisees were failing to get independent advice. The ACCC Report revealed that 40% of prospective franchisees were not getting independent advice before buying a franchise. Notably, under the Code, it is not mandatory for a franchisee to seek business, legal and accounting advice, however it is strongly advised that a franchisee conduct their own due diligence prior to entering a franchise agreement.
For franchisors, it is important to review your current Disclosure Document and your practices in relation to the preparation of your disclosure documents to ensure you are complying with your obligations under the Code. It is important that all necessary information is adequately disclosed so prospective franchisees can make a reasonably informed decision, including any supply restrictions and any key unavoidable costs such as wages, rent or inventory.
For prospective franchisees, if you are thinking of buying a franchise, don't be afraid to speak to former franchisees. If you are not taking the time to contact former franchisees you should reconsider franchising altogether.
Importantly, prospective franchisees should seek advice from independent professionals experienced in providing advice about franchising before entering into a franchise agreement. Be organised and leave enough time between getting advice and signing an agreement, to consider if you should still go ahead with the franchise or if you need to negotiate changes.
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.