The Australian Competition and Consumer Commission (ACCC)’s last franchisor compliance audit found that many franchisors were failing to disclose ‘critical information’ in their disclosure documents. The ACCC found that certain items were commonly not disclosed, such as:
- franchisee contact details;
- stock and product supply restrictions or arrangements; and
- running costs.
Although the audit looked specifically at franchisors in the food sector, the ACCC has suggested that these findings could indicate a wider failure by franchisors to disclose information in accordance with the franchising code of conduct.
As a franchisor, you should take this as a reminder to ensure that you are meeting your disclosure obligations.
This article will outline three common examples of non-compliance from the audit.
1. Too Difficult to Contact Former Franchisees
First, the ACCC found that eight out of the twelve food franchisors in the audit had failed to disclose basic contact information for former franchisees of the franchise system.
According to the ACCC, these details alone are unlikely to meet the obligations of the code.
The ACCC emphasised the importance of facilitating communication between potential franchisees and former franchisees. Former franchisees can often offer prospective franchisees unique insights into running a business within your franchise system. You are therefore obliged to provide contact details.
What Do I Need to Do?
Generally, you must give contact details for former franchisees from the last three financial years.
2. Insufficient Disclosure of Supply Restrictions on Essential Goods
Second, the ACCC found that seven out of twelve franchisors did not provide enough information on which goods their franchisees had to buy from specific suppliers.
As a franchisor, you are entitled to restrict your franchisees to purchasing goods from nominated suppliers. However, you must clearly state any restrictions in your franchise agreement and disclosure document.
In particular, the ACCC was concerned about failures to disclose where franchisors restricted the supply of ‘essential’ goods. Essential goods are goods that franchisees must use.
What Do I Need to Do?
In relation to supply conditions or restrictions, you must disclose:
- whether the franchisee must maintain a level of inventory or acquire a certain number of goods or services; and
- any restrictions on which goods or services the franchisee can acquire from other sources.
3. Insufficient Disclosure of Key Unavoidable Ongoing Costs
Finally, the ACCC also found that a third of the franchisors sampled in its franchisor compliance audit were not sufficiently disclosing key unavoidable costs.
Importantly, the ACCC disapproved of simply stating ‘market rates’ in relation to rent costs. It is unlikely that franchisors adopting this practice are meeting the code’s disclosure obligations set out below.
What Do I Need to Do?
You must disclose, based on your current practices, the:
- costs to start operating the franchised business;
- recurring or single payments to you; and
- recurring or single costs that you know of or be expected to predict.
Key Takeaways
As a franchisor, you should take the ACCC’s recent franchisor compliance audit as a clear sign that compliance with disclosure requirements is a current enforcement priority. If the ACCC suspects that you may not be complying with the code, it can:
- conduct investigations;
- issue penalties or infringement notices; and
- commence legal proceedings.
You should ensure that you have updated your disclosure document before the deadline. Importantly, remember that it is better to ‘over-disclose’ than ‘under-disclose’. This is becase the code’s requirements are minimum disclosure requirements. Therefore, you are free to give further information to potential franchisees. If you need help with ensuring that your franchise complies with the code, contact LegalVision’s franchise lawyers on 1300 544 755 or fill out the form on this page.
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