Comino Prassas Solicitors provide Legal Advice on Buying a Franchise
Buying a franchise should take a lot of guesswork out of operating a small business. Unfortunately its not like that for many franchisees.
It seems you can buy a franchise to sell just about any product. All you need is money, ranging from $20,000 to $400,000, and a great deal of faith.
Indeed the small business opportunities pages of the newspapers are littered with ads for franchise opportunities for products including beds and bakeries, ice-cream parlours, home improvement stores, lawn mowing and pool care.
For the franchisor it has become too easy to charge five to six figure sums for a “proven” small business dream package. There are virtually no warnings, no prospectus requirements outlining the details of the investment and the risks, and few legislative controls.
Most franchisees, anxious to get a “business of their own”, are sitting ducks. This is not to say that there are no franchising success stories. There are, but they are becoming harder to find among the casualties.
Franchising is also becoming one of the fastest ways to lose a superannuation pay-out, accumulated savings and even the family home – which is often used as security for a bank loan to buy or run the franchise.
It seems many franchisors are becoming less choosy about who they sell to and provide less training. They can make money selling their packages regardless of how many franchisees fail, partly because they failure stories are not broadcast and partly because there is always a fresh supply of people on the market, with lump sums ready to invest – often because of redundancy.
In recent years the casualty rate among franchisees has escalated and more disputes with franchisors are heading into the courts for resolution. Cut Price Deli was one of the first to face several court actions from disaffected franchisees, all of which it lost.
Other cases before the courts include well-known names in homewares, menswear, car parts, fast food and pizzas. In the wings are legal actions about to be mounted by an ice cream parlour operator and a bakery.
In short, franchising can be a minefield for potential franchisees. The franchisors say their casualty rate is lower than the small business failure rate, although there are no independent figures to prove this.
The way its supposed to work is that franchisees pay a relatively large amount – up to $400,000 – but reduce their business risk to a minimum by buying proven products and systems, where the process of site selection, training and continuing supervision are resolved, thus dramatically improving the chances of success.
The biggest problem with franchising is that it is a largely self-regulated market.
Honourable franchisors do the right thing by their franchisees and try to resolve any disputes without threat of legal action. However, if this is not the attitude of the franchisor, franchisees find themselves having to sue the franchisor.
And finding the funds to do this is difficult when the franchisee’s business is already going down the tubes. Most franchisees who are caught in this situation have little choice but to walk away from their shops, whereupon many franchisors resell it to someone else for another large sum.
Mr Steven Prassas, a solicitor with Comino Prasas , who has advised a large number of franchisees on their rights, read countless franchise agreements and legally represented one group of homewares franchisees, says the risk factor cannot be completely eliminated but franchise buyers can protect themselves.
“Franchisees should tread carefully and make inquiries about market surveys and demand for the product,” My Prassas says.
“Unfortunately there are a large number of cases before the courts where franchisors have simply misinterpreted and misled potential franchisees in relation to past trading figures to induce them to buy a franchise.
“After all, if the franchisee falls and decides to leave the store, then the franchisor will simply look for another franchisee. In these situations, if there is sufficient evidence in relation to misrepresentation, the franchisee may bring proceedings in the Federal Court of Australia or the Industrial Court of NSW seeking damages.
However, this can be an expensive exercise.”
Mr Prassas maintains that past trading figures indicating store profitability should be carefully analysed by an accountant or solicitor with experience in franchising.
Mr Paul Lynch, a Brisbane solicitor who has run court cases against Cut Price Deli and is now representing another group of franchisees in a major class action under Trade Practices law, says one problem is that the franchisees can end up working long hours for next to nothing – especially in the food industry – competing with other outlets which are open seven days a week and into the night.
He has also found that lack of control over pricing and stock delivery can reduce the franchisee to the role of poorly paid shop assistant, with little or no control over the way the business operated.
“The franchisee assumes to some extent that the store or shop is well located for the product that is being sold and that the franchisor has conducted appropriate market surveys and research into choosing the ideal location,” Mr Prassas says.
“Secondly, there is an assumption by the potential franchisee that the franchisor’s product is in demand,” he says.
“Don’t assume market surveys have been carried out by franchisors in choosing a site, or that there is an existing and growing demand for a franchise product.” 16.11.2007
Contact Comino Prassas Lawyers
1 Newland Street
Bondi Junction
NSW 1355
Tel: 02 9386 5888
