Costs hidden from potential franchisees

Would-be food franchisees are not being given the full picture before they buy into a business, with several franchisors withholding important details including the contact information of former franchisees.

The ACCC has also found food franchisors were consistently failing to disclose key unavoidable ongoing costs, such as wages, rent or inventory, and were not detailing which essential goods must be bought from a specific supplier.

The competition watchdog said it was deeply concerned with the findings in its disclosure practices report released on Tuesday, flagging potential court action against some franchisors it believes are in breach of consumer law.

“Operators of a franchise business can face restrictions imposed by the franchisor, and this is often not realised early enough,” the ACCC said in its report.

“Disclosure is intended to make this clearer … this information assists a prospective franchisee with their due diligence so they can thoroughly consider if franchising is suited to them, and if a particular franchise is a suitable investment.”

The food franchising sector has been hammered by bad press in Australia in recent years following allegations of unfair business practices, including by well-known companies such as Retail Food Group, Domino’s Pizza, and Craveable Brands.

Tuesday’s report follows compliance checks on 12 different franchisors from the food services sector, focused on disclosure of information considered important to someone thinking about buying a franchise.

Among the findings were that eight out of the 12 franchisors made it difficult to contact former franchisees.

“Our message to someone thinking about buying a franchise is to walk away if you can’t easily contact former franchisees,” ACCC deputy chair Mick Keogh said.

“You won’t get a realistic picture of the business without talking to them,” Keogh said.

Seven of the 12 franchisors did not adequately disclose what essential goods were subject to supply restrictions, while most did not share rebate benefits directly with franchisees, and could set maximum retail prices.

The report showed too many people do not get independent advice before buying a franchise.

The ACCC said it would now engage directly with the 12 traders in relation to compliance.

The watchdog receives about 400 reports about franchising each year, with inadequate disclosure by franchisors consistently one of the top two Franchising Code issues reported.

From July to December 2018, the most common franchising reports were about the food services sector, which includes cafes and restaurants, and takeaway food industries.

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