Franchisors in the food services sector have commonly provided inadequate information to potential buyers, while nearly half of prospective franchisees do not get any independent professional advice before buying, a new report has found.
Franchisors in the food services sector have commonly provided inadequate information to potential buyers, while nearly half of prospective franchisees do not get any independent professional advice before buying, a new report has found.
The Australian Competition and Consumer Commission published the 'Disclosure practices in food franchising' report today, which reviews disclosure documents from a sample of 12 franchisors in the food services sector.
The report found one in three franchisors were failing to consistently disclose useful contact details of former franchisees.
ACCC deputy chair Mick Keogh said one of the key steps in buying a franchise was to talk to someone who had been there before.
“Our compliance review identified that some franchisors are making it difficult to contact former franchisees by failing to disclose basic information such as email addresses or mobile phone numbers,” he said.
“Our message to someone thinking about buying a franchise is to walk away if you can’t easily contact former franchisees.
“You won’t get a realistic picture of the business without talking to them.”
The compliance review also found about 40 per cent of potential franchisees did not get any independent advice before buying a franchise.
Under the Franchising Code, seeking independent, legal, accounting and business advice is optional but recommended.
“The message for prospective franchisees is that the costs of setting up and running a food services franchise can amount to hundreds of thousands or even millions of dollars,” Mr Keogh said.
“If you aren’t setting aside the time and money to do proper due diligence, then you should reconsider franchising altogether, as you risk investing in failure.”
The ACCC report said many franchisors did not clearly disclose what essential goods were subject to supply restrictions and which could be purchased at the franchisee’s discretion.
“To comply with the code, franchisors need to explain the detail of any supply restrictions,” Mr Keogh said.
“This ensures someone buying a franchised cafe, for example, knows whether they can shop around for beans.”
Further findings from the review include that one third of franchisors did not adequately disclose key unavoidable costs such as wages, rent or inventory.
Mr Keogh said the poor disclosure by some franchisors of wages, rent and inventory costs was particularly concerning given how essential these were to running most businesses.
The ACCC said it was continuing to assess each trader’s individual compliance to see whether any enforcement action may be needed.
A federal parliamentary inquiry into franchising in March made more than 70 recommendations for change and suggested more regulation.
The parliamentary committee identified systematic exploitation of some franchisees by a subset of franchisors and a regulatory framework that does not provide adequate protection against these practices.
The government established a franchising taskforce in April to determine the feasibility and implementation of the recommendations.
