An active compliance check program by the ACCC will now target businesses in the food services sector, after a quarter of all reports about the franchising code received by the commission was related to inadequate disclosure.
Under the Franchising Code, franchisors must disclose certain information so prospective franchisees can make a reasonably informed decision before they purchase a business.
The information must include certain set up and operating costs, information about supply restrictions which limit the ability of a franchisee to shop around, and if applicable site or territory history to assist the franchisee in assessing the viability of the business.
“This information is vital as it allows them to make better informed decisions, and a lack of disclosure may result in substantial harm to the franchisee,” ACCC Deputy Chair Mick Keogh said.
“The ACCC receives more franchising code related reports from café, restaurant and take-away food franchisees than any other sector, and for this reason franchisors operating in this sector will be the target of our next round of checks.”
Speaking to Accountants Daily, Pitcher Partners principal Simon Johnson said first-time franchisees were often the most vulnerable.
“Those franchisees entering food service are made up of first time or ‘new’ business owners with a lack of experience in assessing business risk, feasibility and due diligence and as a result a corresponding grievance occurs if the level of disclosure is not adequate,” said Mr Johnson.
“In my opinion, it is this type of first-time franchisee that is most vulnerable to any franchisor not making the necessary extra steps to ensure its disclosure is full and at a level that acknowledges the potential lack of experience and knowledge to make a complete and well-considered decision about buying a franchise.”
Mr Johnson had earlier told Accountants Daily that he foresaw greater regulatory oversight for franchisors in light of the royal commission.
“The royal commission has gone at lengths to look at the investment community and those sorts of disclosures and certainly there are some parallels with franchising because at the end of the day this is a very significant investment for a potential franchisee,” said Mr Johnson.
“I think there is an onus on people in an influencing position and in this case we’re talking about a franchisor – it is no different to a superannuation fund or wealth adviser – they are in a position of authority and they are influencing the decisions and choices of the potential investor and I see some extra regulation or compliance and best practices being brought into how a franchisor discloses to a franchisee and whether or not it is an investment decision that is going to suit their goals and their aspirations.”
The ACCC will share some of its findings at the completion of this project to improve the quality of franchisors’ disclosure in this sector, as well as to assist potential franchisees to understand the information made available, and to ask questions if there is a lack of information.
“We also encourage everyone thinking about buying a franchise to carefully examine and understand their disclosure document, ask questions, and get professional advice before signing any franchise agreements,” Mr Keogh said.
Mr Johnson said that accountants can play a big role in helping franchise investors, often mums and dads, by doing a thorough analysis of the franchise business ahead of any investment.