What are your rights in franchising – Comino Prassas solicitors provide legal advice over franchise disputes
Franchising in Australia is estimated to turn over almost 350 billion a year. Its growth is marked by proliferating advertisements offering potential franchise buyers glowing opportunities, fat profits and the chance to be their own boss.
But nothing is foolproof. As Cut Price Deli franchisees recently found out, even franchisors who claim to be long-term success stories are not immune to failure. Cut Price Deli had an administrator appointed earlier this month, citing alleged conspiracies between various parties, predatory competitor tactics, exorbitant rents and extended trading hours by the big food chains as factors behind its demise.
The action has left hundreds of franchisees – several in the litigation pipeline – facing an uncertain future.
Franchisee failures are often not publicised – at least partly because there is still no effective legislation governing the franchise sector. There are no penalties handed down by a regulatory body. And most franchisees are too broke and too traumatised by their failure to take franchisors to court.
But several who have taken court action have won damages and there is more litigation looming against a national franchised delicatessen chain, a pizza distributor and a home improvements and gift chain.
Regardless of what is being franchised, the causes of failure are remarkably similar.
Potential franchises wanting to avoid failure should look out for inflated expected turn-over figures, supplier kick-backs to the franchisor, inflated forecast profit margins and franchise-churning.
A common franchisee complaint is poor siting of the business. It may be that the business being franchised is in a new shopping centre where a rival – or worse, a national chain – also sets up business within a short time cannibalising profit margins with predatory pricing.
Or there is the pizza franchise located at one end of a defined territory with most of the demand coming from the other end, so that it takes an hour to deliver each order by which time the pizza is cold. Or it may be that the new shopping centre just isn’t a goer and the business dies because of poor customer throughput.
According to Mr Steven Prassas – a solicitor with Comino Prassas which acts for a number of franchises – franchisees need to be extremely careful when assessing trading and profit figures presented by the franchisor.
Most franchisors advise prospective franchisees to show their lawyer the franchise agreement before they sign. But if a lawyer is not experienced in franchising, problems may not be identified and appropriate cautions given. Accountants also may take a face value figures provided by franchisors.
Mr Prassas says many franchises claim the franchisor does not listen to their problems once the business has been purchased. Regardless of the problems franchisees may by experiencing, the franchisor can be unwilling to vary the agreement to decrease its own profit margin. The money that can be made from churning franchises provides the less scrupulous franchisors with a positive disincentive to do so.
According to Mr Prassas, another common complaint is that the cost of purchasing a franchise business, together with ongoing administrative franchise and advertising levies – usually a percentage of gross sales – is too high.
When fixed expenses such as rent, electricity and phone are added the net profit to the franchisee is low or non-existent.
Indeed, if many franchisees factored in their time and that of their spouses at market wage rates they would be in a loss – making business: the business only makes a profit because they work for next to nothing.
“We have found that many franchisees are in a position where they are not only failing to achieve the level of sales and profit that the franchisor has told them they would or could achieve, but they are also receiving far less than they would have been paid for the same hours as an employee in the same industry,” Mr Prassas observes.
In fact, franchisors who turn their company-owned shops over to franchisees often make more money then by running the shops themselves.
The industry is currently regulated only by a voluntary code, the Franchising Code of Practice, which has been in force for 2 and a half years. It is estimated that only about half of the nation’s franchisors are registered with the Franchising Code Administration Council.
Mr Prassas suggests that one way franchisees can guard against being misled over projected turnover figures is to demand to see two years audited turnover and profit figures from the particular store they are buying. And audited means by an approved auditor and not the franchisor’s accountant.
Where a franchise is being sold as a new store in a new complex this is more difficult as there are no previous customer or sales figures to go by.
Any projections put forward in this situation should be carefully examined and perhaps rejected on the grounds that they could only be a guess.
Prospective franchisees should also demand that any disclosure document provided by the franchisor include a clear statement as to whether it includes depreciation, salaries or wages for the franchisee, and the cost of servicing any loans. 16.11.2007
Contact Comino Prassas Lawyers
1 Newland Street
Bondi Junction
NSW 1355
Tel: 02 9386 5888
