ACCC finds franchisors not disclosing critical information

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 watchdog has detailed its findings in a report, Disclosure practices in food franchising, which reveals that 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 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.”

The ACCC has also advised prospective franchisees to consult accounting and franchise business experts, after finding that nearly half did not get any independent professional advice before buying a franchise.

“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.

The ACCC explained that most franchisors have supply restrictions meaning they can legally tell a franchisee where they have to buy their goods and services. Its 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.

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

There are around 80,000 franchisees in Australia – mainly small and family businesses employing more than 470,000 Australians.

Last year, a parliamentary inquiry into the effectiveness of the franchising code of conduct handed down 71 separate recommendations, designed to strengthen and expand protections for franchisees.