ACCC finds food franchisors not disclosing critical information

27 August 2019

The ACCC has found that franchisors in the food services sector are commonly providing inadequate information to potential franchisees.

In its most recent round of compliance checks of the franchising industry, the ACCC reviewed disclosure documents from a sample of 12 franchisors in the food services sector and found many were problematic.

The findings are detailed in a report, Disclosure practices in food franchising which detailed that around one in three franchisors are failing to consistently disclose useful contact details of former franchisees.

“One of the key steps in buying a franchise is to talk to someone who has been there before,” ACCC Deputy Chair Mick Keogh said.

“Our compliance review identified that some franchisors are making it difficult to contact former franchisees by failing to disclose basic information such as email addresses or mobile phone numbers.”

“Our message to someone thinking about buying a franchise is to walk away if you can’t easily contact former franchisees. You won’t get a realistic picture of the business without talking to them,” Mr Keogh said.

The compliance review also found nearly half of prospective franchisees did not get any independent professional advice before buying a franchise. Under the Franchising Code, seeking independent legal, accounting and business advice is optional but strongly recommended.

“The message for prospective franchisees is that the costs of setting up and running a food services franchise can amount to hundreds of thousands or even millions of dollars. If you aren’t setting aside the time and money to do proper due diligence, then you should reconsider franchising altogether, as you risk investing in failure,” Mr Keogh said.

Most franchisors have supply restrictions meaning they can legally tell a franchisee where they have to buy their goods and services. The compliance review found many of the franchisors did not clearly disclose what essential goods were subject to supply restrictions.

“To comply with the Code, franchisors need to explain the detail of any supply restrictions. This ensures someone buying a franchised café, for example, knows whether they can shop around for coffee beans,” Mr Keogh said.

Other findings from the review include that one third of the franchisors did not adequately disclose key unavoidable ongoing costs, such as wages, rent or inventory.

“The poor disclosure by some franchisors of wages, rent and inventory costs is particularly concerning given how essential these are to running most businesses,” Mr Keogh said.

These costs must be disclosed if they are within the knowledge or the control of the franchisor or are reasonably foreseeable by the franchisor.

The ACCC is continuing to assess each trader’s individual compliance, including whether any enforcement action may be warranted.

The ACCC has released this report now because many franchisors are currently reviewing and updating their disclosure documents, as they are required to do annually under the Franchising Code.

Prospective franchisees can go to Buying a franchise? Know the risks to access a number of resources about franchising. These include short videos which provide key information on some of the risks of franchising and what people need to do before signing up.

These resources and videos have been translated into Chinese Simplified, Chinese Traditional and Hindi.

Release number: 
155/19
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