ASK BEFORE YOU COMMIT
What franchisors can and can’t do when it comes to preferred suppliers.
Asignificant benefit to being part of a franchise system is that the franchisor has negotiated key supply agreements with suppliers. This is aimed at ensuring quality and standards are met, and that customers are delivered a consistent standard of product or service.
It also means that as a franchisee you may have access to discounts based on the volume of orders placed by the franchisee group. In theory, this should give you a greater margin in selling your products or services.
These supply arrangements are material contracts that a franchisor will have negotiated for the benefit of franchisees.
1. REBATES
What is the difference between a discount and a rebate?
A discount is provided by a supplier as an upfront incentive, and is a reduction in the purchase price.
A rebate is a portion of the purchase price refunded by the seller to the buyer when certain purchase levels are reached. It is an amount paid by a reduction, return or refund on what has already been paid.
The rebate is generally paid to the buyer. In franchising, the buyer may be the franchisor or one of its related companies that then on-sells and supplies the product or services to the franchisees. Where the franchisee buys stock, for example, from one of the approved suppliers, the rebate may be paid direct to the franchisee; however, that is often not the case and there is no obligation for the supplier to do this.
The Franchising Code of Conduct recognises that rebates are legal and there is no obligation on the franchisor to provide the whole or any part of the rebate
What your franchisor can and cannot do when it comes to
preferred suppliers and rebates.
it receives back to the franchisee.
Of course there might be some tension if you discover your franchisor is not only receiving a royalty on franchisees’ gross sales and a marketing levy, but also gains extra revenue from supplier rebates.
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2. DISCLOSURE OBLIGATIONS
The Franchising Code of Conduct requires franchisors to disclose:
• if they will receive a rebate (or some other financial benefit) for supplying goods or services to a franchisee • which business is providing the rebate or benefit, and whether the rebate will be shared among the franchisees. There is no requirement for the franchisor to share the rebate, even though franchisees may be compelled to buy their products or services only from pre-approved suppliers.
However, there is a good-faith obligation under the code that franchisors need to consider when forming their rebate policy.
There have also been cases where the forcing of excess stock on a franchisee to enable the franchisor to recoup higher rebates may be considered unconscionable conduct under Australian Consumer Law.
3. ONLINE SALES
Franchisors are required to disclose: • whether a franchisee can make goods or services available online if the franchisor or an associate of the franchisor can also do so if the franchisor may, or is expected to, make goods or services available online in the future.
Details of those arrangements need to be disclosed upfront if they affect franchisees either directly or indirectly. These disclosures are designed to promote transparency in the franchise sector.
4. THIRD-LINE FORCING EXEMPTION
Third-line forcing occurs when the franchisor requires a franchisee to buy products or services exclusively from approved thirdparty suppliers. Third-line forcing is a breach of Australian consumer laws and is prohibited. However, a franchisor can apply for an exemption from the Third-line forcing provisions from the ACCC.
If the franchisor requires you to use its approved suppliers, it must first seek statutory exemption under Australian consumer law by notification to the ACCC. This exemption provides protection to the franchisor from legal action under the Competition and Consumer Act where the conduct redsults in a net public benefit which outweighs the public detriment. In many cases, the franchise agreement will state that the franchisee may use one of the recommended suppliers.
If the preferred supplier is not able to supply the product or services, you are then free to use an alternate source. However, it is important to first seek the franchisor’s approval for external sourcing to ensure quality and standards are maintained.
5. ARE LEASE INCENTIVES A REBATE?
Again, the Franchising Code of Conduct requires the franchisor to disclose any financial incentive that it or its associates receive in exchange for agreeing to lease or entering into a lease. Again, there is no requirement for the franchisor to pass on that financial benefit to the franchisee.
This means the franchisor can retain any landlord lease incentive and still ask the franchisee to pay the full fit-out costs to establish the business. This may seem somewhat unfair, and the franchisee should ask the franchisor whether that is the case.
Third-line forcing is a breach of Australian consumer laws and is prohibited. However, a franchisor can apply for an exemption from
the ACCC.
THINGS TO REMEMBER
You should:
• Carefully review and understand the terms of the franchise agreement in relation to supplier rebates, lease incentives and the obligation to use only approved suppliers
• Before signing the franchise agreement, ask the franchisor if they receive rebates, and if so, do they retain the full amount or share it with the franchisee
• Ask the franchisor if you are obliged to buy goods and services only from approved third-party suppliers.
If goods or services are not available from the approved suppliers, can you source these readily elsewhere to run your business?
Ask the franchisor about their online sales strategy and policy and the impact these might have on your business.
By asking these questions before you commit, you will be able to make a more informed decision on whether to take up the franchise opportunity.