The nation’s food franchisors have been slammed in a scathing report handed down by the Australian Competition and Consumer Commission (ACCC).
In its Disclosure practises in food franchising report, released on Tuesday, the ACCC revealed that one in three food franchisors failed to consistently disclose useful contact details for former franchisees.
The announcement comes after a recent round of compliance checks identified serious concerns. The ACCC reviewed disclosure documents from a sample of 12 food franchisors, finding many were non-compliant.
Mick Keogh, ACCC deputy chair said having adequate access to former franchisees was critical to the due diligence process.
“One of the key steps in buying a franchise is to talk to someone who has been there before,” Keogh said.
“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. 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.”
Franchisee requirements
Aside from the disclosure concerns, the ACCC compliance review also found that nearly half of all prospective franchisees were opting not to seek professional advice prior to purchase.
Keogh said that while seeking independent financial, legal and business advice was not required under the Franchising Code of Conduct, it was strongly 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,” 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.”
Food franchisors review
A requirement of the Code, however, is the disclosure of supply restrictions. In Australia, most franchisors are legally allowed to dictate where a franchisee purchases goods and services.
In its compliance review, the ACCC found that many food franchisors did not clearly disclose what essential goods were subject to supply restrictions.
“To comply with the Code, franchisors need to explain the detail of any supply restrictions. This ensures someone buying a franchised café, for example, knows whether they can shop around for coffee beans,” Keogh said.
Additionally, the ACCC’s compliance review also found that some food franchisors had failed to accurately disclose key unavoidable ongoing costs, such as wages, rent or inventory.
“The poor disclosure by some franchisors of wages, rent and inventory costs is particularly concerning given how essential these are to running most businesses,” Keogh said.
These costs must be disclosed if they are within the knowledge or the control of the franchisor or are reasonably foreseeable by the franchisor.
The issues of disclosure and supply rebates have been front and centre this week, after the government’s newly established franchising taskforce released an issues paper on Friday.
The paper seeks comments on a range of industry-specific topics, and serves to form the government’s response to March’s Fairness in Franchising report.
According to the ACCC, the watchdog will continue to assess each trader’s individual compliance, including whether any enforcement action may be warranted.