In February this year, the Australian Competition and Consumer Commission (ACCC) announced it would focus its compliance checks on franchisors in the food services sector.
In late August, the ACCC released a report on its findings, ‘Disclosure practices in food franchising: Key ﬁndings of targeted compliance checks of franchisors in the food services sector’.
Here are the five key findings and what you can do to ensure you won’t fall foul of the ACCC and current Franchising Code of Conduct obligations:
Franchisors are making it difficult to contact former franchisees
Only four out of 12 franchisors were consistent in supplying potential franchisees with up-to-date, relevant contact details (personal email addresses and mobile numbers). Some provided details of the former franchise location (it’s difficult to contact someone who isn’t there!) while others provided none at all.
Leaving prospective franchisees in the dark about the realities of operating the business doesn’t do either of you any favours. Franchisors should keep contact details up-to-date and relevant – snail mail is not the best way to contact someone nowadays so stick to email and mobile numbers.
Franchisors aren’t adequately disclosing what essential goods are subject to supply restrictions
Restrictions on franchisors controlling what can be sold through a franchise and where it must be sourced from can limit choice but still generally fall within the bounds of the law. However, under the Franchising Code, a franchisor must disclose details of any supply restrictions on essential goods and services. It is not enough for a franchisor to refer to approved products and services and or refer to an operations manual. Rather, a franchisor should be providing a detailed list of the goods and services and the supply restrictions that apply to those goods and services.
Most franchisors had supply restrictions, but did not share rebate benefits, and could set maximum retail prices
While each of these things is permitted, having all three in place can impact a franchisee’s ability to run a profitable business.
Franchisors should spend time reviewing their disclosure documents and amend them to include details of any supply restrictions or rebates. It is important franchisors (if they haven’t already done so) spend some time reviewing their franchise agreement to remove any unfair contract terms including, but not limited to, obligations and or restrictions relating to rebates, maximum retail prices and the supply of goods and services.
Some franchisors are not sufficiently disclosing key unavoidable costs
Four of the franchisors failed to sufficiently disclose standard operating costs in the areas of inventory, rent and property, and labour.
Prospective franchisees aren’t seeking professional advice before entering into a franchise agreement
While there is an obligation under the Franchising Code to advise a prospective franchisee to seek independent legal, accounting and business advice, it is not compulsory for them to do so. While this requirement is seen as optional, best practice guidelines should see franchisors requiring franchisees to seek independent professional advice. This will lead to a better informed franchisee and a more successful working relationship between the two of you.
So, what’s next?
The ACCC has said it is continuing to assess the 12 franchisors, and some of the disclosure practices it discovered may be in breach of the Franchising Code and/or Australian Consumer Law.
It’s fair to assume the results of these compliance checks mean the ACCC will be keeping a closer eye than ever on franchisors, not just those operating in the food services sector. Certainly, changes are afoot for the entire franchising industry following the Franchising Inquiry earlier this year.