The competition watchdog is urging prospective franchisees to check and substantiate claims made about potential income, following complaints in the cleaning and home services industry.
The Australian Competition and Consumer Commission says it has received a number of complaints from franchisees who allege they were promised a minimum “guaranteed” income but then derived little or no income from their franchise.
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According to the ACCC, many of the complaints relate to franchisors in the cleaning and services industry, which had been identified as vulnerable.
“The ACCC is investigating whether a number of franchisors in this industry engaged in misleading or deceptive conduct by making claims about potential earnings,” acting chairman Michael Schaper said in a statement.
“The ACCC is particularly concerned by franchisors which appear to target people from non-English speaking backgrounds who may not fully understand the agreements they are entering into.”
Schaper said franchisors must have a “reasonable basis” for making all income representations to potential franchisees.
The news comes less than two months after a franchisee couple was awarded $1.22 million in damages after a successful appeal against franchisor Billy Baxter’s.
Billy Baxter’s is a chain of licensed coffee houses, cafés and restaurants.
Ross and Sue Pollard operated a Billy Baxter’s greenfield site in the Adelaide suburb of Glenelg, but did not achieve the turnover anticipated by the franchisor’s representative, Phillip Mauviel.
Mauviel anticipated a turnover for the business of $1.3 million, and suggested turnover would allow the business to pay the rent and return a profit.
These representations – made during the course of negotiations for the site at Glenelg – drew comparisons with an existing Billy Baxter’s outlet in another Adelaide suburb.
However, the Glenelg franchise suffered losses, which meant the franchisees were unable to pay the fees due under the franchise agreement. They then terminated the franchise agreement.
The franchisor accepted their termination as repudiation of the franchise and proceeded to pursue legal action to recoup the outstanding fees.
The franchisees denied the claim and counterclaimed on a range of matters, including that they had been induced to enter into the franchise agreement by the misleading and deceptive conduct of Mauviel.
The original judgment found in favour of the franchisor and highlighted that Mauviel had provided a spreadsheet template.
It also found the franchisees ignored advice to enter their own information into the spreadsheet, and to seek independent legal, business and accounting advice.
However, a Victorian Supreme Court of Appeal decision found there were no reasonable grounds for Mauviel to make the representations regarding turnover.
According to the ACCC, franchisors misrepresenting the potential income of a franchise can be subject to litigation and court-imposed penalties of up to $1.1 million per contravention.
Schaper said while most franchisors do the right thing by their franchisees, there appears to be a growing number of franchisors who are making promises they cannot keep.
“The ACCC strongly encourages anyone who is thinking about buying a franchise to talk to other franchisees – ask if they are earning as much as they expected,” he said.
“You should also discuss your franchise agreement with a lawyer and an accountant. If you don’t understand it, don’t sign it.”
The ACCC’s tips when buying a franchise:
- Beware of promises that you will earn a guaranteed income, as well as “get rich quick” schemes that claim you can make large amounts of money with little effort.
- If the franchisor makes verbal claims, ask them to confirm those claims in writing.
- Get advice from a lawyer and accountant before entering into an agreement or handing over any money.
- Speak to existing and past franchisees. Their contact details should be in the disclosure document that the franchisor is required to give you before you enter into an agreement.
- Know your cooling off rights – you can terminate an agreement within seven days of entering into it or making any payment under it; whichever occurs earlier.