The competition and consumer watchdog is renewing calls for prospective franchisees to “do their homework” before taking on a franchise, after a nation-wide courier company was fined $1.9 million in penalties for misleading prospective franchisees.
In proceedings brought by the Australian Competition and Consumer Commission (ACCC), the Federal Court declared in March that Megasave Couriers Australia breached consumer law by making false or misleading representations to incoming franchisees.
Last month, the court ordered the company to pay $1.9 million in penalties, and director Gary Bourne to pay a penalty of $120,000.
Megasave admitted that, from September 2019 to July 2020, it promised potential franchisees guaranteed minimum weekly payments of about $2,000 and an annual income of $91,000.
However, the company was not paying its existing franchisees the promoted payments, and it did not have the revenue to pay franchisees in line with its claims.
Speaking to SmartCompany, ACCC deputy chair Mick Keogh says conduct of this kind warrants strong penalties, as many Megasave franchisees lost substantial savings and endured distress.
“We exercise continual calls to prospective franchisees to really do their homework,” he says.
The ACCC’s franchising resources encourage all prospective franchisees to talk to previous franchisees associated with the chain they’re interested in, to seek business and legal advice about agreements prior to signing them, and not to rush into making a decision.
“That’s a hallmark of what we see as unsuccessful franchise businesses — where the franchisee rushes into it because it’s seen as an opportunity that won’t be available if they don’t hurry,” Keogh says.
Since 2018, the ACCC has received an average of 400 complaints a year from franchisees concerned with what they were told not matching what they experienced after taking on a franchise business.
Keogh says one of the biggest issues arises from franchisees underestimating how much effort is required to successfully operate a franchise business.
Franchisees also often misunderstand the constraints that apply to their business. For example, the franchisor might have arrangements in place where they supply all the goods their franchisees use in their network.
“So even though you might think you can source bread rolls more cheaply from another source, often under a franchise agreement, you are obligated to source the product or to have all of your suppliers provided by the franchisor,” Keogh explains.
The complexity of rules relating to the lease of a premises is also a common concern in franchise arrangements, which can result in disputes over who owns the lease and who is responsible for paying capital upgrades to premises.
There’s also “considerable uncertainty” around exiting a franchise agreement, including the rights of franchisees to sell as well as the obligations they have when they decide they might want to exit a business, Keogh says.
The ACCC is responsible for investigating all alleged breaches of the franchising code of the Competition and Consumer Act, making it well-placed to understand the limitations of the current code.
In a parliamentary inquiry into the Franchising Code of Conduct in 2019, the ACCC recommended the government consider legislating a licensing regime for franchisors.
“We certainly have concerns that no amount of code provisions seem to prevent that sort of situation arising,” Keogh says.