Food franchisors are failing to disclose important information about the costs of running a franchise and are making it difficult for prospective business partners to contact former franchisees, the Australian Competition and Consumer Commission (ACCC) has found.
A recent round of compliance checks undertaken by the competition watchdog on a sample of 12 franchisors in the food services sector has identified widespread non-compliance with the Franchising Code of Conduct.
A third of franchisors subject to the compliance checks weren’t adequately disclosing information about wages, rent and inventory costs to prospective franchisees, while seven of the 12 didn’t properly disclose details about supply restrictions on essential goods.
The extraordinary findings come as heated debate rages in the $182 billion franchise sector over proposed reforms to industry regulations, following recommendations made by a broad-based Senate inquiry into franchising earlier this year.
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Problematic disclosure practices were one of the biggest complaints among franchisees who gave evidence to the inquiry, amid allegations networks including Retail Food Group and Domino’s have oversold opportunities to some franchisees.
As franchisors continue to fail to comply with longstanding regulations, calls are growing for a separate legislative framework for franchising to be developed by the federal government.
Food services franchisors have not showered themselves in glory over the last few years, with a series of scandals surfacing in some of the largest networks in Australia.
Franchisees of Michel’s Patisserie are preparing a class action against their franchisor, which SmartCompany understands has attracted significant interest in recent weeks.
ACCC chair Mick Keogh said franchisors were failing to disclose basic information such as the email addresses or mobile phone numbers of former franchisees to prospective partners.
“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,” Keogh said in a statement circulated Tuesday.
The ACCC did not reveal the identities of the franchisors it sampled, but said the practices it identified are “particularly concerning”.
Under the franchising code, which the ACCC administers, franchisors must disclose information about unavoidable payments such as wages and rent to prospective franchisees.
Franchisors must also disclose details of supply restrictions to prospective franchisees and provide the contact information of former franchisees unless those former partners opt-out.
The report also found 40% of prospective franchisees did not seek any independent professional advice before entering their franchise agreements.
While it is not necessary under the current franchising code for prospective franchisees to obtain independent advice, making it a requirement was a key theme of the Senate inquiry.
Keogh said costs for setting up a food services franchise can range from a few hundred thousand dollars to “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,” Keogh said.
But Matthew Wheatley, president of the Australian Association of Franchisees (AAF), says it’s “extremely difficult” for prospective franchisees to conduct proper due diligence under current regulations.
“If franchisors aren’t prepared to give the details of ex-franchisees, I’d be asking the question: ‘Is there something to hide?'”
Wheatley says franchisees are dealing with conflicted networks which are trying to maintain their store numbers and grow their brands, resulting in a sales-driven franchise culture.
“A lot of franchisees are sold a story that’s not necessarily the case, a pretty picture gets painted,” he says.