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 documentsThe 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.

If you are not meeting your disclosure obligations, you should fix this before 31 October 2019. This is the deadline set by the code for updating disclosure documents to reflect your position as at the end of the last financial year.

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.

For example, some franchisors had only given a postal address or the location of the former franchise.

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. 

The only exception to this is if a former franchisee requests in writing that their details not be disclosed to a prospective franchisee. In this case, you do not need to disclose the former franchisee’s contact details. However, you cannot influence a former franchisee to make, or not make, such a request. 

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.

An example of this might be a cafe franchisor who did not disclose that the franchisee needed to buy coffee beans from an approved or nominated supplier. 

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

For example, some disclosure documents were failing to itemise costs such as: 

  • wages; 
  • rent; or 
  • stock purchasing 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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