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ACCC Report Requires Franchisors To Consider The Quality Of Information Provided In Disclosure Documents

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By Louise Wolf, Senior Associate, MST Lawyers

As 31 October approaches, the ACCC’s recent report on findings from their compliance checks of franchisors in the food services sector is a timely reminder to reconsider particular aspects of disclosure when attending to annual disclosure document updates.    

Earlier this year, utilising the power under s.51ADD of the Competition and Consumer Act 2010, the ACCC conducted compliance checks on the franchise agreements and disclosure documents of 12 franchisors.

They took a targeted approach, focussing on franchisors in the food services sector.  The compliance checks themselves were confined to select issues, which included the quality of disclosure pertaining to contact details of existing and former franchisees, supply restrictions and rebates, disclosure of costs and expenses and the level and types of pre-purchase advice sought by franchisees. 

The compliance checks indicated that some concerning trends exist in the franchised food services sector.  The ACCC reported that:

  • 8 out of 12 franchisors made it difficult to contact former franchisees, with only 4 out of 12 franchisors providing mobile numbers and personal email addresses;
  • 7 out of 12 franchisors did not adequately disclose what essential goods are subject to supply restrictions;
  • Most franchisors had supply restrictions, did not share rebate benefits and had the ability to set maximum retail prices.
  • A third of franchisors did not sufficiently disclose key unavoidable costs, such as wages, rent or inventory.
  • Over 40% of prospective franchisees did not seek any professional advice before entering into a franchise agreement.

The report contains these important messages for prospective franchisees. 

  • Make sure that you talk to existing and former franchisees. If franchisors make it difficult to contact former franchisees, consider walking away.
  • The franchising model does not allow the same level of control as running your own business independently. Supply restrictions are generally legal, and you need to have a clear understanding of whether you will be restricted from shopping around for goods and services that are fundamental to the operation of the franchise.  If you don’t like the idea of that control, consider whether franchising is right for you.
  • If critical costs and expenses, including wages, rent and costs of goods are not properly disclosed, then you are not getting a true picture of the costs of running a franchise.
  • Seeking advice from lawyers, accountants and business advisors who are experienced in franchising is critical. Obtaining one type of advice is generally not enough.  Allow time after getting advice, to consider whether or not to proceed. 

The report also contains the following key messages for franchisors.

  • Check the details provided for former franchisees in the disclosure document to ensure it is easy for prospective franchisees to make contact with former franchisees. Personal email addresses and mobile numbers are best.  The address and phone number of the former franchised site are not sufficient.  Retain evidence of any former franchisee that has opted out of having their details disclosed.
  • Disclosure regarding supply restrictions should include the type of goods and services that are affected and the name of the supplier (if known). Referring to an operations manual or a definition of approved products without listing the types of goods and services is not sufficient.
  • Take care to ensure the interplay between supply restrictions, rebates and the ability to set maximum prices does not lead to unfair contract terms.
  • Disclosure must be made of all costs and expenses that are within the knowledge or control of the franchisor or are reasonably foreseeable. Disclosure must comply with the Code and not be misleading.
  • Franchisors need to encourage prospective franchisees to seek experienced franchising legal, accounting and business advice and then give them time to take action based on that advice.

Improvements within the franchising sector in Australia are necessary to minimise the frequency of negative experiences for both franchisees and franchisors.  The ACCC’s report contains important messages for both franchisors and prospective franchisees which aim to make the processes of franchising more transparent.  This coupled with the ACCC’s investment in new resources to assist prospective franchisees including videos https://www.accc.gov.au/update/buying-a-franchise-know-the-risks in English, Hindi, Cantonese and Mandarin are steps towards increasing the awareness of prospective franchisees. 

In addition, the Franchising Taskforce has been established and is currently considering the Government’s response to the Fairness in Franchising Report of the Parliamentary Joint Committee on Corporations and Financial Services.  There are many changes to the law that are being considered by the Taskforce, including changes to disclosure requirements.  These changes will impact all franchisors.

MST Lawyers is providing a free seminar on 9th October 2019 which will outline the ways in which the proposed changes may affect your business.   To attend, please follow the link and register online.

Louise Wolf, Senior Associate at MST Lawyers, was seconded to the ACCC for six months to work with the ACCC on the compliance checks mentioned above.  Her experience strengthens the team at MST Lawyers with particular insight into the ACCC’s approach to compliance checks and their approach to franchise disclosure and unfair contract terms.  If you would like to speak to our Franchise Law team about your franchising needs, email us or call us on + 61 3 8540 0200.