In franchise recruitment it’s crucial to exercise caution in the messages communicated with the franchise buyer.

Entering into a franchise agreement is an exciting time for a franchisor and franchisee, with both parties eager to negotiate the foundations of their future business relationship. While a franchisor will want to provide the best possible impression of their franchise system, extra caution must be given to the promises, statements and representations made to a franchisee.

Although there are countless dos and don’ts, franchisors should avoid saying six key things:

1. Statements without evidence

The simple test is if you do not have evidence to back it up, then do not make the statement. The subject matter of all discussions with a franchisee should be contained in the franchise agreement, disclosure document or operations manual. Evidence to back up any statements must be kept for at least six years.

Remember, there are serious consequences for providing a statement which is likely to mislead or deceive. It is not necessary for anyone to actually be misled or deceived.

Franchisors should avoid stating opinions.

There are a range of offences under the Australian Consumer Law regarding misleading and deceptive conduct as well as unconscionable conduct. Franchisors must also be mindful of their good faith obligations towards franchisees under the Franchising Code of Conduct.

Some examples:

• The letting agent has told you the shopping centre is fully let. You have no evidence. You cannot tell the franchisee unless you attribute the statement to the letting agent and make it clear that you have no evidence.
• There is no competition in the area. A blanket statement like that is cause for concern if you have not carried out full enquiries and even then, you can’t be sure. It is bBetter to say you know of no competition but you cannot be certain as all businesses do not register.

2. Statements about future matters

Under section 4 of the Australian Consumer Law, a person must be able to prove that they have reasonable grounds for making a statement about a future matter. The onus here shifts to the person making the statement to prove they had reasonable grounds to make it.

If the franchisor does not have reasonable grounds, and the franchisee relies  on the statement, then the statement could be found to be a misleading representation and leave the franchisor liable to the franchisee for damages.

Therefore franchisors should avoid making statements based on future‘predictions alone unless there are strong grounds to make the statement and evidence to support those grounds.

3. Providing financial statements

Franchisors should avoid giving financial statements to franchisees. If a franchisor feels that it is necessary to provide statements, then the statement should be based on actual figures reported by existing franchisees. A blanket average should never be provided.

For example, financials should be split between best, medium and worst figures actually reported. A really good or really bad business can distort the figures.

The word ‘reported’ is key. Ensure that the franchisee is fully aware that the financials are based only on sales disclosed by existing franchisees.

If the prospective franchisee is purchasing an existing franchised business, they should obtain profit and loss statements from the existing franchisee. A franchisor should also avoid giving any opinion as to the suitability of the price the prospective franchisee is paying the existing franchisee for the business.

4. Guaranteed profits

A franchisor should never guarantee that a franchisee will make a certain income or profit out of the franchised business (or any profit for that matter).

The franchisee should be told that the success of the business will be dependent on their own business skills.

The franchisee should be encouraged to carry out their own investigations and to obtain independent legal, accounting and business advice before entering into the franchise.

For example, a franchisor might guarantee that a franchisee will make an annual profit of $100,000 based on the franchisor’s feasibility study of the franchise location.

If the franchisee relies on this information to sign the  franchise agreement, does not reach the $100,000 profit and discovers that the franchisor had no reasonable grounds for making the representation, then a Court might set aside the franchise agreement and order the franchisor to pay compensation to the franchisee.     

5. Site locations

Again, in the absence of strong evidence, statements about site location suitability should be avoided. In the 2012 case Trans-It Freighters Pty Ltd v Billy Baxters (Franchising) Pty Ltd, the franchisor’s representative told the franchisee that the greenfield site would be a good location for a franchise. The business was ultimately unsuccessful, and the franchisor was liable to pay compensation.

A franchisor should simply give the franchisee all information that is available and leave the decision making to the franchisee.

For instance, the landlord for a retail site will provide a disclosure statement that may detail any major anchor tenants or supermarkets opening in the centre. The franchisee can use this statement when assessing the suitability of the location.  

6. Expected trading levels

Similar to site location suitability, franchisors should not make statements about expected trading levels because these are statements about future matters.

In the 2012 case Miletich v Murchie, a leasing agent made representations to a franchisee on behalf of a developer about expected trading levels in a shopping centre development. Many of the stores which had been promised to the franchisee never opened and the franchisee could not make a profit due to lack of foot traffic. The franchisee was entitled to compensation.

The principle in this case can extend to a franchisor making the same sort of promises to a franchisee about a site location.

What can a franchisor do to protect themselves?

It is prudent for a franchisee to sign a prior representations deed at the same time as signing the franchise agreement. This is a document which should contain a number of ‘yes’ or ‘no’ questions to prompt a franchisee to consider whether any promises or representations have been made.

If a franchisee does not record any representations, then unless the franchisee can demonstrate that they were coerced to answer that particular way, the franchisor can rely on the prior representations deed.  

Courts have held that these deeds can go to the credibility of a franchisee in any court action.  It is difficult to explain why you answered “no” to a question and then say you actually did rely on a statement.

But remember, franchisors cannot contract out of any representation that has been made.   

Franchisors always need to be mindful of what to say and what to avoid, careful not to mislead a franchisee and remember the consequences of making a statement which the franchisee may rely on.