Australia has a rich franchise environment full of diverse franchising opportunities and in most cases provides a solid foundation for a successful business. By entering into a proven business model and system a franchisee is given the tools and support system to grow their business.

However, it is crucial that all franchisees understand that it still requires plenty of hard work and dedication to successfully run a franchise.

Potential franchisees must always ensure that they carefully select what business or franchise they intend to enter. While rogue businesses are uncommon, not all franchises represent legitimate business opportunities.

The Australian Competition and Consumer Commission has previously identified pyramid schemes disguised and advertised as franchise opportunities. These are often characterised by online businesses which recruit people to its so-called franchise network. Once recruited investors are required to sign up more franchisees without receiving any further benefit from the purported ‘franchisor’.

To raise awareness of these unsavoury business practices we have highlighted some red flags that may indicate a franchise opportunity could be less than genuine.

Red flag: transparency

Genuine franchisors will be open and transparent in the application and negotiation process. The franchisor will give the franchisee time to do their due diligence and investigate the pros and cons of entering into the franchise.

Red flag: full disclosure

Another potential red flag is if a franchisor fails to properly disclose all the required information to a franchisee. Under the Franchising Code of Conduct, a franchisor must supply a prospective franchisee with their disclosure document. In this document, a franchisor is required to disclose certain information in relation to the history of the franchisor, its directors and officers, whether there is any litigation against the franchisor or its directors, details of current and past franchisees in the network as well as details of  the franchisor’s financial standing.

If a franchisor does not provide their disclosure document or supply all the required information they may have something to hide.

Red flag: franchisor pressure

If a franchisor pressures a potential franchisee to make a quick decision to enter the franchise it is appropriate to ask why. Under the Franchising Code of Conduct all franchisees must be given a 14 day disclosure period during which period the documents cannot be signed, and there is also a seve day cooling off period after the franchise agreement has been signed.

The purpose of these mandatory periods is to give a franchisee ample opportunity to obtain advice and make a reasonably informed decision about whether or not the franchise is right for them.

If a franchisor is pressuring a franchisee to sign the franchise agreement as soon as possible, the franchisor may be attempting to sign up as many franchisees as quickly as it can without allowing for proper negotiation and further consideration of the franchise documents.

Red flag: too good to be true

A franchisee should have realistic expectations when entering into a franchise. If a franchisor promises that a franchisee will be profitable without hard work and effort this should cause some alarm.

Franchises can be very profitable for franchisees willing to put in the time and effort to make their business work. The future performance of the franchise should not be exaggerated. Potential scams will often try to entice franchisees by offering a business with inflated earnings potential.

Red flag: business experience

Good franchisors will be able to show proven experience and a good track record in the marketplace -not necessarily that they have been franchising for many years, but it may be that the particular business has been operating corporate owned stores in the marketplace for some time prior to offering franchises. The directors and managers of the franchisor should have extensive experience in running the business or industry expertise.

The Australian franchise industry is well protected from potential scams by the Franchising Code of Conduct and the ACCC. All potential franchisees are encouraged to do their due diligence in deciding to enter into a franchise. Before entering into an agreement franchisees should know as much as possible about the franchisor and the franchise network as possible.

A franchisor’s disclosure document is very important when entering into a franchise agreement. If a disclosure document is incomplete or contains insufficient details it is important that a franchisee request further particulars from the franchisor to enable proper disclosure.

Ensuring that all required information is included in a disclosure document will greatly enable a franchisee to ascertain the legitimacy of the franchisor and the franchise opportunity.

It is recommended that franchisees obtain legal advice on franchise documents and do their own market research into a franchisor and the franchise brand. The more informed a franchisee can be the better equipped they are to enter into a franchise agreement.

Bianca has extensive experience and advises on a range of national and international transactions, industry master and area development rights and advises both franchisors and franchisees in dispute, obligations under the Franchising Code of Conduct and the Competition and Consumer Act.