Disclosing potential franchisee expenses

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Table of Contents

• Obvious potential significant expenses
• Less obvious potential significant expenses
• Conclusion

Under the Franchising Code of Conduct, Franchisors are required to disclose all potential franchisee expenses (clause 30 of the Franchising Code of Conduct) to a Franchisee. If a Franchisor does not disclose a cost, it could potentially mean that the Franchisee is not required to pay for the cost if it arises. Having reviewed and written a large number of Franchise Agreements, our Franchise lawyers know that most Franchisors only disclose some of the more obvious potential significant expenses.

Obvious potential significant expenses

Some of the more obvious potential significant expenses are, for example, expenses relating to replacing and fixing equipment, replacing and fixing fit out, and relocation costs. Almost all Franchisors will disclose these costs, as they are the most easily identifiable and come to mind most readily.It is not until you start thinking about the Franchise business in more depth that you start to unravel the less obvious expenses.

Less obvious potential significant expenses

While disclosing these potential significant expenses is important, there are also many more potential expenses relating to running a Franchise, which Franchisors generally don’t disclose. These are generally related to the day-to-day running of the Franchise business. While it could be argued that these expenses, being day-to-day expenses, don’t fall under the “significant expenses” classification. However, these day-to-day expenses do add up and therefore over the term of any franchise agreement could be considered “significant expenses”. Below are just some of these “less obvious” potential significant expenses.

• in-store promotion costs – the potential cost of having to run an in-store promotion. For example, store signs, pamphlets or even giveaways;
• telephone and internet expenses – almost all Franchises nowadays require some form of internet access. Over just one year, this can run up to $1,000, and over a 5 year term, this would equal $5,000;
• uniform expense – any store-based Franchise normally requires the Franchisee and Franchisor to wear uniforms. These generally need to be bought from the Franchisor (or an approved supplier) and if it also involves cleaning, then the cost can increase significantly;
• bank fees, Eftpos facilities and credit card fees – everyone who has ever dealt with a bank knows that they get charged fees, but with credit card fees normally running at about 1.5 – 2% of sale price, the cost for Franchisees to allow customers to pay by credit card can quickly accumulate; and
• pest control – most relevant in any food based franchise, but also applicable generally, pest control is most commonly a one off annual expenses that will need to be paid by Franchisees.

Conclusion

These are just some of the potentially significant expenses which a Franchisee will be required to pay over the term of any Franchise Agreement. To ensure that you are not caught out for failing to disclose any potential significant expenses, contact us and have one of our Franchise Lawyers review your Franchise Agreement and Disclosure Document.