Food franchisors not disclosing critical information

Following a review of a sample of Australian food franchisors, the ACCC has clamped down on failures by franchisors to disclose certain information to potential franchisees. While this particular review was limited to the food services sector, the issues uncovered are likely to be indicative of practices within the broader franchise industry.

Following a media release by the ACCC in February 2019 forewarning businesses in the sector of upcoming compliance checks, late August saw the publication of two aptly-timed updates aimed at the franchising industry:

Given most franchisors are tasked with completing mandatory updates to their disclosure documents by 31 October each year, it is hoped that the timing of these developments will encourage franchisors to enhance their transparency and improve the quality of information disclosed to prospective franchisees.

Key findings uncovered by the Food Franchising Report as a result of compliance checks on 12 different franchisors in the food services sector include criticism that many franchisors:

  • make it too difficult to contact former franchisees (for instance by failing to provide email addresses and contact numbers);

  • do not adequately disclose which goods are subject to supply restrictions;

  • set supply restrictions and maximum retail prices but do not share rebate benefits directly with franchisees (factors which can limit a franchisee’s ability to make a profit);

  • do not sufficiently disclose key unavoidable ongoing costs such as wages, rent or stock; and

  • do not actively encourage prospective franchisees to get independent advice before buying a franchise.

The key import is that franchisors should seek to give prospective franchisees enough information to help them make an informed decision about whether to invest in the franchise and ensure that their updated disclosure documents contain current information that is material to the operation of the business.

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