Assessing risk: The prospective franchisee’s responsibility

By Sponsored | 04 Feb 2019 View comments

There is no doubting that 2018 was a difficult year for the franchise sector, and with the impending results of the Parliamentary Inquiry into the Franchising Code of Conduct set to be handed down in February, 2019 is shaping as a year destined for sector change.

The inquiry has revealed many things, the least of which being that the last round of amendments which took effect on 1 January 2015 did little to prevent the wide range of complaints by franchisees that have emerged with increasing frequency since late 2016.

Come February, the sector may see some substantial changes to the way franchise systems are governed, however no amount of legislative change will negate the need for prospective franchisees to assess the risks of a franchise acquisition.

Prospective franchisees need to take responsibility for their decisions and that starts with a full investigation into what they are buying.

What matters are included or not included in the Code from time to time cannot and will never be able to compensate for a failure of a prospective franchisee to be properly educated about franchising, the franchise system in which they are considering the acquisition of a franchise and what business they are buying.

In its opening statement to the inquiry, the Australian Competition and Consumer Commission (ACCC) urged prospective franchise buyers to better prepare themselves for a purchase.

”The party that takes the most risk in entering these relationships is clearly the franchisee, who needs to be able to better understand the risk they are taking, their ability to incur any losses, and what will happen if their significant investment in money, time and hard work does not pay off,” the ACCC said.

In a 2016 joint study between Griffith University and UNSW entitled “The effectiveness of undertaking due diligence prior to starting up or purchasing a small business or franchise”, researchers found that many persons considering the purchase of a franchise did not make adequate investigations of the business they intended to acquire, leading to difficulties further down the track.

It is incorrect and unhelpful for prospective franchisees to proceed under the belief that the franchisor’s disclosure document answers, or is intended to answer, all their questions, and provides them with all relevant information.

Prospective franchisees must conduct further investigations and responsible franchisors should encourage franchisees to seek whatever relevant information they need to make an informed decision.

Experienced franchise lawyers realise that the Code, and the franchisor’s disclosure document, recognise some of the commercial risks to franchisees that tend to inhere in certain clauses of franchise agreements, but by no means should it be assumed that the Code or disclosure document recognise all relevant risks that a prospective franchisee needs to consider.

Ultimately, prospective franchisees would benefit from changes to the Code that make it mandatory for franchisees to obtain legal, accounting and business advice before they sign a franchise.

If you are considering making a franchise purchase, it is imperative that you seek the advice of a professional franchise lawyer, such as the industry-leading Morgan Mac Lawyers. For more information about their services, visit franchisebusiness.com.au/service-suppliers/morgan-mac-lawyers