KEEPING TABS
The Franchising Code of Conduct is regulated by the ACCC.
Buy into a franchise and there will be rules and regulations
that govern the conduct of franchisee and franchisor.
Buying a franchise can be exciting, especially if you’re looking to buy into a brand you know and love.
The Franchising Code of Conduct is a mandatory industry code across Australia which regulates the conduct of franchising participants towards each other. It requires the franchisor to provide you with certain information to assist you in making an informed decision about a franchise opportunity.
The Australian Competition and Consumer Commission (ACCC) regulates the Code and provides guidance and updates to the franchise sector on the Code and broader ACCC activities.
UNDERSTAND THE RISKS
You should conduct due diligence before any business decision. You can assess the risks of a franchise decision by:
• finding out what would happen if you,
or the franchisor, became insolvent • working out how much capital would be required to establish the franchise and keep you going if you have a slow start • understanding the consumer demand
for the product or service
• asking what will happen at the end of the agreement, and whether you are able to renew, extend, or in the event of a sale, transfer the agreement • considering whether the franchise matches your personal attributes, skills, experience and lifestyle • completing a pre-entry franchise education program (www.franchise. edu.au/) to find out how franchising works, and
• researching the franchise system.
DISCLOSURE DOCUMENT
Under the Code, franchisors must provide a disclosure document, which will tell you about the franchisor, its officers and the franchise system. Information you’ll find in your disclosure document includes:
• relevant business experience of each officer of the franchise
• certain legal proceedings against the franchisor, its directors or associates
• contact details of current and former franchisees
• whether the franchise is for an exclusive territory.
The franchisor must give you the disclosure document, a copy of the franchise agreement in its final form and a copy of the Code at least 14 days before you enter into the agreement or make any non-refundable payments. When reviewing your disclosure document, it’s worth paying attention to:
STATEMENT OF SOLVENCY – the franchisor must provide a signed statement confirming that the franchisor will be able to pay its debts.
START-UP COSTS – the franchisor must outline the range of costs associated with establishing the franchise (such as legal fees and equipment).
ONGOING OR FORESEEABLE EXPENSES
– the franchisor must provide details of any payments you must make to them or their associates such as royalties, marketing or advertising fees, uniforms and merchandise. The franchisor must also disclose any payments that the franchisor knows, or reasonably foresees, you will be required to make to other people.
PREVIOUS INSOLVENCY – the franchisor must disclose if the franchisor, its directors or associates have been bankrupt or insolvent under administration in the last 10 years. If the franchisor was insolvent during the last two financial years, they must provide you with a solvency statement and an auditor’s report about the current solvency of the business.
SUPPLY ARRANGEMENTS AND
RESTRICTIONS – the disclosure document must include any limitations on the suppliers from whom you can buy goods and services, or whether the franchisor has nominated specific suppliers you must use. If there are any restrictions on sourcing supplies or services this may need to be factored into the cost of the business.
TOP FRANCHISEE TIP: If you become a franchisee, you can request a copy of the franchisor’s latest disclosure document once every 12 months.
You should always check your franchise agreement and disclosure document carefully before entering a franchise to identify any costs you might face.
It is also a requirement under the
Code that the franchisor provide you with an information statement when you apply, or express an interest, in buying a franchise. This is a two-page document highlighting some of the risks and rewards of franchising.
WHAT ELSE THE CODE REGULATES
SIGNIFICANT CAPITAL EXPENDITURE
Under the Code, the franchisor can’t force you to make significant capital purchases such as new equipment of stock unless you agree to it, or:
• it was in the disclosure document you were given before your entered (or renewed) your agreement
• the expenditure is system-wide and a majority of franchisees agreed to it
• it’s needed to meet a legal requirement
• the franchisor justifies in writing why it’s necessary (including the benefits and risks), and how much it’s likely to cost you.
You should always check your franchise agreement and disclosure document carefully before entering a franchise to identify any costs you might face. It’s also a good idea to ask your franchisor whether there are likely to be any future initiatives (such as rebranding or upgrades) that could lead to additional costs.
EARNINGS INFORMATION
If the franchisor or their representatives make claims about how much you can earn, how much other franchisees earned or how much the previous franchisee earnt in the past, ask them to confirm the claims in writing. You should also get professional advice to check how feasible these claims are for you.
GET INDEPENDENT PROFESSIONAL ADVICE
A crucial step in undertaking your due diligence involves seeking independent professional advice from a lawyer, accountant and business advisor. These advisers will help you to thoroughly review all documentation provided to you. In particular, this advice will guide you with: understanding any guarantees you may be asked to provide considering any additional leasing or licensing agreements you may be required to enter in to reviewing the costs associated with the franchise developing and testing a business plan, including projected income and expenses.
SPEAK TO OTHER FRANCHISEES
The most valuable advice you receive will likely come from the people who were in your shoes. Ask questions such as: what have your experiences been like with the franchisor? what sorts of challenges have you experienced with running your business? are you happy with the earnings? would you buy this franchise again?
(if they’re a former franchisee) why did you leave the system?
Buying a franchise is a significant financial and personal commitment. Reading the ACCC’s Franchise manual at accc.gov.au is an essential first step to working out whether franchising is right for you.
Dr Michael Schaper is the ACCC deputy chair. His special focus is on small business, franchising, industry associations and business liaison with the national competition and consumer protection regulator.