Check out our update on the recent ACCC report on franchisor disclosure practices. This update is particularly important for our franchisor clients at BlueRock:
As part of your disclosure obligations under the Franchising Code of Conduct, you are required to update your disclosure document within 4 months of the end of each financial year (ie by 31 October).
ACCC report on disclosure practices
In August, the ACCC released a report on disclosure practices in franchising. Although the investigation focused on food franchises, the findings are relevant across the board and should be taken into consideration when completing the annual update of your disclosure document.
The report follows an investigation by the ACCC, as part of which the ACCC ran compliance checks on 12 different franchisors from the food sector. The checks focused on disclosure of important information to prospective franchisees.
Some of the key findings from the investigations were:
- Most franchisors made it too difficult to contact former franchisees;
- Most franchisors did not adequately disclose what essential goods were subject to supply restrictions;
- Almost all franchisors impose supply restrictions, do not share rebates directly with franchisees and could set maximum prices (which are all generally legal practices but can combine to limit a franchisee’s ability to make a profit);
- Some franchisors did not sufficiently disclose key unavoidable ongoing costs such as wages, rent and inventory; and
- 40% of prospective franchisees did not get any independent advice before entering into the agreement.
Contact details for former franchisees
The ACCC’s advice to prospective franchisees it very clear – if you cannot easily contact former franchisees, don’t buy the franchise. When updating your disclosure document it is important to ensure you have included email addresses and/or mobile phone numbers of former franchisees to allow prospective franchisees to make contact with them within the 14 day disclosure period (unless the former franchisee has requested that their details be excluded from the disclosure document).
Adequate disclosure of supply restrictions
The ACCC indicated that it is not sufficient to refer to “approved products” in the disclosure document when providing details of supply restrictions, details of the type of products included in this category need to be included so that it is very clear to franchisees what they can and cannot source from alternate (potentially cheaper) suppliers.
Franchisee’s ability to make a profit
As was a focus in the recent “Fairness in Franchising” Report, the ACCC is concerned about common practices that, when combined, can severely limit a franchisee’s ability to make a profit. It is important to ensure that if you are imposing supply restrictions on a franchisee and/or setting maximum retail prices, franchisees can still receive a margin on the sale of goods, particularly in circumstances where a franchisor is receiving a rebate from suppliers and the franchisee is not entitled to a share in that rebate.
Disclosure of key unavoidable costs
In section 14 of the disclosure document you are required to disclose payments a franchisee must make, including to a person other than you or your associate, where the costs are within your reasonable knowledge or control or are reasonably foreseeable. The information disclosed must not be misleading. The ACCC found that many franchisors are not adequately disclosing inventory, rent, property and labour costs in their disclosure documents.
We strongly recommend carrying out a detailed review of this section of the disclosure document as part of your annual review.
Want the full report?
In addition to focusing your attention on the above items, as part of your review you will need to carry out a core section update. This includes updating the following core compliance sections:
- Details of any litigation;
- New associates (including associated companies of the Franchisor);
- Existing franchisees/company owned stores;
- Payments – new payments, increase payments; and
- New financials for the past 2 years (or auditors statement if applicable).