Disclosure practices in food franchising
ence. We also found low rates of independent advice seeking
by prospective franchisees. Some of the key findings of targeted compliance checks of 12 franchisors
involved in the food services sector were:
most made it too difficult to contact former franchisees
most did not adequately disclose what essential goods were subject to supply restrictions
almost all had supply restrictions, did not share rebate benefits directly with franchisees, and could
set maximum retail prices. These are generally legal, but can combine to limit a franchisee’s ability to
make a profit.
some did not sufficiently disclose key unavoidable ongoing costs, such as wages, rent or inventory
40 per cent of prospective franchisees did not get any independent advice before buying
a franchise.
We consider the above findings to be particularly concerning. In some instances, franchisors may have
breached the Franchising Code and/or the Australian Consumer Law. We are continuing to assess
each trader’s individual compliance, including whether any enforcement action may be warranted.
Only a court can determine whether someone has breached the Franchising Code or the Australian
Consumer Law.
We have issued this public report to increase transparency and the quality of information provided
to prospective franchisees in disclosure documents. Most franchisors in Australia must complete
mandatory updates to their disclosure documents by 31 October each year. We strongly encourage all
participants in franchising to use the findings to improve their disclosure practices.
2 Disclosure practices in food franchising
Process
The Franchising Code is a mandatory industry code.
Under the Franchising Code all franchisors must maintain a disclosure document and provide this to
someone thinking about buying a franchise before a franchise agreement is entered into. The ACCC
enforces the Franchising Code and can issue section 51ADD notices to conduct compliance checks.
Twelve franchisors were selected based on reports to the ACCC about the industry and/or the
franchisor, and intelligence from industry stakeholders.
In February 2019 we issued a media release outlining which disclosure areas we were targeting, and
that our focus would be on the food services sector.
Each franchisor was then issued a separate section 51ADD notice. The notices focused on documents
that would enable the ACCC to assess what was disclosed to a prospective franchisee prior to entering
a franchise agreement.
While the 12 franchisors who were issued notices are a small sample of the estimated number of
franchises operating in Australia (over 1,300) they are from the same sector (food services) and provide
a robust sample of practices in that sector.
We then assessed the documents against the requirements of the Franchising Code and the Australian
Consumer Law, and from the point of view of a prospective franchisee. Following the publishing of this
report we will engage directly with the traders in relation to their individual compliance.
3 Disclosure practices in food franchising
Key findings
Most of the franchisors made it too difficult to contact
former franchisees
8 out of 12 franchisors made it dicult
to contact former franchisees
?
Contacting former franchisees is an important step someone should take if they are thinking about
buying a franchise. However, we found 8 out of 12 franchisors did not disclose contact details for
former franchisees in a way that allowed contact to be made easily or at all.
Personal email addresses and mobile numbers allow for the quickest and simplest contact method, but
only 4 of 12 franchisors consistently supplied these to prospective franchisees.
The remaining franchisors primarily supplied one or more of the following: contact details for the former
franchise location, residential or postal addresses, occasional landlines, or no contact details at all.
Some franchisors may not provide longer than a 14 day disclosure period, so providing residential or
postal address means contact may not be possible in practice.
Only supplying contact details for the former franchise location is unlikely to satisfy the requirement
under the Franchising Code to provide ‘contact details’ where the former franchisee no longer operates
the business.
Under the Franchising Code franchisors must give a prospective franchisee a disclosure document at
least 14 days before entering into a franchise agreement. The contact details of former franchisees must
be listed in the disclosure document. A former franchisee can opt out if they don’t want their details
listed, but the franchisor must not influence them to do this.
Franchisors If you’re thinking of buying
a franchise
Review the contact details of former
franchisees in your disclosure documents
so that it is not difficult for prospective
franchisees to make contact.
Franchisees that have realistic expectations
are likely to be more satisfied with their
franchise experience.
If you are not disclosing contact details
then you must have evidence of the former
franchisee opting out.
You are unlikely to get a realistic idea
about franchising without talking to
former franchisees.
Most small business owners in Australia
have a personal mobile and email address. If
phone numbers or email addresses of former
franchisees aren’t in your disclosure document
or it is difficult to contact them, this can be a big
warning sign to walk away.
Franchising can be very different to other
types of business. If you aren’t taking the time
to contact former franchisees you should
reconsider franchising altogether.
4 Disclosure practices in food franchising
Most franchisors did not adequately disclose what essential
goods were subject to supply restrictions
7 out of 12 franchisors did not adequately
disclose what essential goods were subject
to supply restrictions
?
Franchisors usually control what can be sold through a franchise and where it must be sourced from.
Even though they can limit choice for franchisees, such restrictions are usually not against the law.
Under the Franchising Code franchisors must disclose the details of supply restrictions. This allows
a person buying a franchise to understand whether or not they can shop around for essential goods
before they sign up, amongst other things.
We found 7 of 12 franchisors were not adequately disclosing what essential goods were subject to
supply restrictions. This means, for example, someone buying a café franchise can’t tell whether they
can shop around for coffee beans or whether they have to buy them from a specific supplier. This can
have significant consequences for a franchisee’s business if they are paying more than their competitors
for essential high volume goods.
While most franchisors had terms in their agreements that allowed franchisees to source goods from
elsewhere subject to approval from the franchisor, it is unclear how often this happens in practice. The
ACCC consistently receives reports and enquiries about supply restrictions from current franchisees.
Franchisors If you’re thinking of buying
a franchise
You need to disclose the details of supply
restrictions to franchisees, including what
type of goods and services are subject to
supply restrictions.
This is particularly important for goods and
services that are unavoidable and essential to
running a franchise, such as coffee beans in a
café franchise.
It is not enough to simply refer to an
operations manual or a definition of approved
products without actually listing details of the
type of goods and services.
Supply restrictions are common in franchising
and are generally legal.
It is important to know before you buy a
franchise whether you can shop around for
the goods and services that are important to
running the franchise.
If the franchisor doesn’t clearly tell you, then
you should reconsider the franchise. You
should also verify what a franchisor says
about supply restrictions by speaking to
current franchisees.
If you don’t like the idea of supply restrictions
then you should reconsider whether
franchising is right for you.
5 Disclosure practices in food franchising
Most franchisors had supply restrictions, did not share
rebate benefits directly with franchisees, and could set
maximum retail prices
Most franchisors had supply restrictions,
did not share rebate benefits, and could
set maximum retail prices
Franchising can be extremely restrictive and this is often not understood early enough by
prospective franchisees.
Of the 12 franchisors we looked at, the vast majority had the following in their franchise agreements:
restrictions on where a franchisee could source essential goods
the franchisor received rebates or financial benefits from purchases made by franchisees, and did
not share these directly with franchisees
the franchisor could set maximum retail prices for products sold by franchisees.
These are generally permitted in franchising and are usually legal. However, these three things can
combine to limit the capacity of a prospective franchisee to make a profit. While details of supply
restrictions have to be disclosed, it will be difficult for prospective franchisees to assess this risk if
they don’t know what type of goods are subject to supply restrictions. As set out previously, 7 of
12 franchisors did not adequately disclose what essential goods were subject to supply restrictions.
Here is a hypothetical example to demonstrate. A café franchise only permits a franchisee to buy coffee
beans from a certain supplier (supply restriction). The price of these beans is more expensive than
coffee beans from other sources and the franchisor gets a financial benefit (rebate) every time a bag
of coffee beans is sold to a franchisee. This adds to the franchisee’s costs of doing business, especially
if the rebate isn’t shared with them directly. Then, as part of a marketing push, the franchisor limits the
maximum price a franchisee can sell a cup of coffee to $3 (maximum retail price). The franchisee still has
to pay the same price for the bag of coffee but the promotion, in combination with higher coffee bean
costs, is likely to impact on the profitability of the franchise business.
Details of supply restrictions and rebates have to be disclosed in a disclosure document. The ability of a
franchisor to set maximum retail prices does not have to be disclosed in that document, but franchisees
should look for such a term in the franchise agreement itself.
Franchisors If you’re thinking of buying
a franchise
Unfair contact term laws apply to many
standard form agreements, including
in franchising.
Where it applies, you need to ensure that
your franchise agreements, including
terms covering restrictions, rebates and
maximum retail prices don’t contain unfair
contract terms.
A term may be an unfair term if it causes a
significant imbalance in power, goes beyond
what is reasonably necessary to protect a
franchisor’s legitimate business interests and
causes detriment to franchisees if it were
relied upon.
Franchising can be extremely restrictive. In
a franchise you won’t have the same level
of control compared to a business you
run independently.
To understand how franchising works in
real life call current and former franchisees,
and get professional independent advice.
Disclosure only tells you about some parts
of franchising.
If you don’t like the idea of rebates or
maximum retail prices then you should
reconsider whether franchising is right for you.
6 Disclosure practices in food franchising
Some franchisors aren’t sufficiently disclosing key
unavoidable costs such as wages, rent or inventory
A third of franchisors aren’t suciently
disclosing key unavoidable costs such
as wages, rent or inventory
It is common for franchises in the food services sector to have key unavoidable costs such as rent,
wages, and inventory. These are recurring costs that are an essential part of the business. To get a
realistic idea about a franchise these costs and the amounts need to be in disclosure documents.
Of the 12 franchisors we looked at, a third didn’t sufficiently disclose inventory, rent and property costs,
or labour costs (wages, superannuation). This included referring to wages but not listing any figures, or
referring to market rates for lease costs.
If these costs are within the knowledge or control of the franchisor or are reasonably foreseeable, they
must be disclosed to prospective franchisees. This is important as payment of costs are often specific
terms of a franchise agreement, and inability to pay can result in breaches or termination.
Franchisors must comply with both the Franchising Code and the Australian Consumer Law. Under the
Australian Consumer Law a business may be liable for engaging in misleading or deceptive conduct if
it makes a representation that is false or misleading. This includes representations made in a disclosure
document about estimated future costs.
Franchisors If you’re thinking of buying
a franchise
You must disclose payments a franchisee
must make, including to a person other
than you or your associate where the costs
are within your knowledge or control or are
reasonably foreseeable.
For many franchises in Australia costs such
as wages, rent and inventory are unavoidable
recurring costs.
Disclosure of costs must comply with the
Franchising Code and must not be misleading.
If wages, rent or inventory are not properly
disclosed then you’re not getting the true
picture of the costs of running a franchise.
You should get independent professional
advice about costs for your particular
situation. Make sure the advisor has
experience providing franchising advice.
7 Disclosure practices in food franchising
Too many people do not get independent advice before
buying a franchise
Over 40% of prospective franchisees
did not seek any independent professional
advice before entering a franchise agreement
It is not compulsory for persons purchasing a franchise to obtain independent advice, but it is
highly recommended.
Under the Franchising Code a franchisor must advise a prospective franchisee to get independent legal,
accounting and business advice. A prospective franchisee can choose not to get advice.
For the franchisors we looked at over 40 per cent of prospective franchisees did not seek any
independent professional advice before entering into a franchise agreement.
Franchises can have set up and running costs that range from hundreds of thousands to millions, and
agreements with very restrictive terms and conditions. Getting advice is very important so the risks and
limitations of franchising are properly understood.
Franchisors If you’re thinking of buying
a franchise
Encourage prospective franchisees to get
independent professional advice, and give
them time to take action based on that advice.
Get advice from independent professionals
experienced in providing advice about
franchising. They will see risks you can’t.
You should get legal, accounting and business
advice. Getting one type of advice is usually
not enough.
Leave enough time between getting advice
and signing an agreement to consider if you
should still go ahead with the franchise or to
negotiate changes.
8 Disclosure practices in food franchising
ACCC assessment
Disclosure of certain information to someone thinking about buying a franchise is a key requirement of
the Franchising Code, however this information needs to be useful to a prospective franchisee.
The ACCC found differing disclosure practices across the 12 franchisors. The practices outlined in this
report are particularly concerning.
The purpose of a disclosure document is to give a prospective franchisee information to help them
make a reasonably informed decision about investing in the franchise, and give current information that
is material to the running of the franchised business.
In our assessment we identified many instances where disclosure may fall short of the requirements of
the Franchising Code.
What will the ACCC do?
The ACCC enforces the Franchising Code. In line with our Compliance and Enforcement policy we use
a range of tools to encourage compliance and prevent breaches of the Competition and Consumer Act
2010 (Cth) and the Franchising Code.
We are concerned about the poor disclosure practices identified amongst the group of 12 franchisors,
and that these may be indicative of practices within the food services sector or the broader
franchise industry.
We are also very concerned about the low rates of advice seeking amongst prospective franchisees
connected with these franchisors.
Some disclosure practices we have identified may be a breach of the Franchising Code and/or the
Australian Consumer Law.
We are continuing to assess the 12 franchisors and to engage with these traders. In line with our
Compliance and Enforcement policy, where we see a risk of widespread small business detriment as a
result of disclosure practices, we can take enforcement action.
We have produced this report to encourage better transparency and information for prospective
franchisees, and to encourage more prospective franchisees to seek independent advice.
We remind all prospective franchisees that disclosure is only one aspect of considering whether
franchising is suitable. The nature of franchising as a business system needs to be clearly understood
before committing significant time and money. Another step to take to assist with understanding this is
to talk to current and former franchisees.
9 Disclosure practices in food franchising
What can the franchising industry do?
Franchisors are responsible for keeping disclosure documents up to date in accordance with their
obligations under the Franchising Code, and are in the best position to improve disclosure practices in
the franchising industry.
A successful franchise system relies on the success of its franchisees. Selling a franchise to someone
who is not suited to, or doesn’t understand franchising risks setting them up for failure. It is in
franchisors’ interests to be helpful and transparent in their dealings with people looking to buy a
franchise and to provide clear and meaningful information in disclosure documents.
The ACCC offers a range of resources for franchisors and prospective franchisees such as our Quick
Guide to a Franchise Disclosure Document and short videos to support better disclosure by franchisors
and better due diligence by prospective franchisees.
We encourage the franchising industry to use this report to review and improve their
disclosure practices.
Prospective franchisees can use this report and other ACCC tools to identify poor disclosure practices
and, if necessary, to reconsider the franchise or getting into franchising at all.
If someone is concerned about the practices of a franchisor they can make a report to the ACCC. Each
report is individually assessed. While we can’t take action in relation to every report, each report allows
us to better direct our resources towards addressing the greatest harm.
Franchisee or prospective franchisees with individual disputes can contact the Australian Small
Business and Family Enterprise Ombudsman who can assist in the resolution of franchising disputes.
See Resolving franchising disputes for more information. The ACCC does not provide legal advice
or individual dispute resolution services. See What we can and can’t do for small business for more
information
