What to look out for when entering a franchise

When looking at a potential franchise it is easy to get caught up in what is essentially a ‘sales pitch’ from franchisors. More often than not franchisors will try to sell their franchise model with statements such as ‘huge profits’ and ‘thriving business’! And while in many instances this may be true, prospective franchisees should make their own investigations before entering a franchise agreement to ensure that the franchise business is the right fit for them.

Misleading and deceptive conduct (case study)

Misleading and deceptive conduct is one of the most frequent allegations arising in franchise disputes. The Supreme Court of New South Wales recently looked at this issue in the case of Carazi Pty Ltd v Blow Dry Bar Franchising Pty Ltd (in liq) and Anor.

In that case a franchisee entered into a franchise agreement for the purchase of a blow dry hairdressing salon. The franchisee was promised that the business involved low investment, high profits and did not need him to work in the salon or have any hairdressing experience. In fact, the franchisor said they would find a suitable site for the franchise, find and train the staff and, design and fit out the salon. Essentially, they would do it all! This was alluring to the franchisee who lived in a different state to the franchise and wanted a business investment that could essentially ‘run itself’.

Prior to entering the lease for the premises and franchise agreement, the franchisor (and its representatives) made a number of statements to the franchisee that ultimately were found by the Court to be false, deceptive and misleading. These statements included that all the existing franchise salons were ‘extremely profitable…and are usually cash flow positive within 1 month’. The franchisee also asked a number of times whether all the salons were profitable and he was told by the franchisor they were. The franchisor went even further by sending the franchisee profit and loss statements for other Blow Dry Bar businesses showing the salons were profitable. These financial documents were in fact for company run salons and contained misleading information.

Despite being told the location chosen for the salon was ‘a great new site’, it was an undesirable location for a hair salon with little passing foot traffic. The salon never traded profitably.

The Court found that the franchisor had engaged in misleading and deceptive conduct and awarded damages pursuant to the Australian Consumer Law.

What are the lessons to be learnt from this case study:

• Make sure you carefully evaluate all information given to you by a potential franchisor;
• Be aware that potential franchisors are trying to sell you something – their business!
• Speak directly to existing franchisees. Are they happy in their business? Would they ‘do it all again’ if they had another chance? and
• Obtain proper advice – accounting, taxation and/or business advice plus legal advice before making such a huge investment.

Conclusion

Buying a franchise is a significant investment of both time and money, so it goes without saying that doing your due diligence and research into the franchise is imperative. While franchisor’s are prohibited from providing prospective franchisees with false, misleading or deceptive information, it is still important for the franchisee to be aware and pragmatic when it comes to making a final decision on entering into a franchise agreement. If you have questions regarding what to look for when entering a franchise, whether you’re a franchisee or franchisor, give LegalVision a call on 1300 544 755 and one of our franchise lawyers will be happy to help.