by Mick Keogh
The Australian Competition and Consumer Commission (ACCC) is Australia’s competition and consumer regulator, and regulates the Franchising Code of Conduct (the Code), which includes the power to investigate and take enforcement action when appropriate. The ACCC allocates enforcement priority to certain matters, with a particular focus on franchising issues involving large or national franchisors.
The Code sets out the rights and obligations of both franchisors and franchisees. It requires franchisors to disclose specific information to potential and existing franchisees, and sets out conditions on the rights of both parties under a franchise agreement. It also provides a way for franchisees and franchisors to resolve disputes.
The ACCC proactively conducts a code compliance program each year, which requires selected franchisors to provide copies of franchise documents including disclosure documents, franchise agreements, and marketing fund statements. The ACCC can ask a corporation for copies of information or documents it is required to keep, generate or publish under a prescribed industry code. The corporation has 21 days to provide these documents. Giving false or misleading information or documents to the ACCC in response to an audit notice is a serious offence.
The four key documents which must be given to prospective franchisees are an information statement, a disclosure document, a copy of the franchise agreement in its final form, and a copy of the Franchising Code. The franchisor must allow at least 14 days for franchisees to review the disclosure document, franchise agreement and Code before an agreement is entered into or any non-refundable payments are made. It is important that the disclosure document contains accurate and reliable information and details about the franchisor and the system, which can help prospective franchisees make an informed decision.
This includes disclosing the relevant business experience of all its officers. In 2017, following an ACCC investigation, Morild Pty Ltd (trading as Pastacup) paid penalties of $100,000 for failing to disclose that its director, Mr Bernstein, was previously a director and manager of two previous Pastacup franchisor companies that became insolvent. The Court also found Mr Bernstein (the company’s co-founder and former director) was knowingly concerned in Morild’s conduct and ordered him to pay penalties of $50,000.
A franchisor’s disclosure document also needs to include contact numbers of existing franchisees as well as franchisees that have exited the franchise system in the last three financial years (unless the exited franchisee requested otherwise). In November 2017, West Aust Couriers Pty Ltd (trading as Fastway Couriers in Perth), paid $9,000 in penalties after the ACCC issued them with an infringement notice. The ACCC alleged that a disclosure document provided to a prospective franchisee did not include details of former franchisees that had terminated or transferred their Fastway Courier. Including the contact details of current and former franchisees can help prospective franchisees to conduct their due diligence by enabling them to contact both existing and former franchisees, to gain insight into how the franchise system works.
The ACCC plays a key role in educating franchising participants by providing a range of guidance to help franchisees and franchisors understand their rights and responsibilities under the Code. The ACCC also supports a free online franchising education program provided by FranchiseED. This is a great starting point for prospective franchisees to learn about what’s involved with running a franchise business.
For franchisors wanting to cultivate a productive network of satisfied franchisees, it is worthwhile ensuring that franchisees enter into the franchise relationship with realistic expectations and are given a good understanding of what the franchise opportunity entails. For example, franchisors’ supply arrangements with specific suppliers (which may be the franchisor itself or its associates) may be a component of the franchise arrangement not fully understood by prospective franchisees. Importantly, a franchisor needs to include certain information about its supply arrangements in its disclosure document, including whether the franchisor or its associate receives any rebate or financial benefit from supply arrangements.
Equally it’s important that prospective franchisees take every opportunity to understand what is expected of them when running their franchise business. One area of concern that the ACCC has identified is that some franchisees do not seek independent professional advice as part of this process. Under the Code, franchisors are required to obtain a signed statement from franchisees confirming that this advice has been sought, or alternatively a statement that they were aware that advice should have been sought but have decided against it. The ACCC also encourages franchisees speak to an accountant and a business advisor to prepare financial modelling which can help franchisees work out whether the business is viable in the short and long term.
How can the ACCC help?
- The ACCC also has a wealth of information for franchisees, including detailed information on the Code, FAQs, a manual for franchisees and factsheets, available on the ACCC website: www.accc.gov.au/franchisingcode
- The ACCC’s free pre-entry franchise education program delivered by FranchiseED can also help prospective franchisees assess franchise business opportunities.
- To keep up to date with events, court cases, changes to the law in the franchising sector you can sign up to the ACCC’s Franchising Information Network at www.accc.gov.au/fin
- Anyone can also contact the ACCC for further information about their obligations under the Code or to report alleged breaches.