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Chapter 6 T hree Ess ential Steps in Franchise Research

Chapter 6

Three Ess ential Steps in Franchise Research

Mick Keogh | Deputy Chair Austral ian Comp et it ion and Consum er Comm iss ion

About the Author

Mick Keogh was appointed to the ACCC in February 2016, and then as Deputy Chair of the ACCC in 2018, with responsibility for Small Business and Agriculture. Mick has a long and diverse history of involvement with the small business and agriculture sector, including periods of employment as a business consultant, and in advocacy and advisory roles to policymakers and governments. He has also chaired a number of Commonwealth Government inquiries and Ministerial advisory boards, and is currently a member of the Commonwealth Government’s Emission Reduction Assurance Council, and a Boardmember of the Food Agility Co-operative Research centre. From 2003 to 2018, he was Executive Director of the Australian Farm Institute, an independent policy research institute that conducted research into strategic policy issues of importance to Australian agriculture and regional Australia. Mick continued in that role until his appointment as Deputy Chair of the ACCC in June 2018.

Mick was awarded the Order of Australia Medal in 2015. He holds bachelor’s and master’s degrees in science, both obtained at the University of New South Wales. Mick’s role at the ACCC includes involvement in a range of committees, as well as oversight of the small business, franchising and agriculture units of the ACCC.

If you are considering franchising as a business venture, you’ll be off to a good start if you do the following key things:

Take your time to understand whether a particular franchise or franchising, in general, is suited to you;

Speak to former and current franchisees of the system you are interested in;

Get independent professional advice. Don’t just rely on legal advice.

Franchising has the potential for both franchisors and franchisees to build their businesses into well-functioning operations that are rewarding for both parties. This requires both sides of the relationship to go in with their eyes open.

As Australia’s competition and consumer regulator, the ACCC enforces the Competition and Consumer Act (2010). This includes the Australian Consumer Law and the Franchising Code of Conduct (the Franchising Code).

Franchisees mainly contact us when things are not going well with their franchise. Sometimes problems arise because of bad practices by franchisors, and scammers have used the Franchising Code as a cover for fraudulent schemes. But problems can also emerge because a franchisee did not understand what they were entering into.

Here are three essential steps in researching a franchise.

1.Thinkaboutwhetherfranchising is foryou

Franchise systems that operate profitably for franchisees often started as a small business venture, and have grown into a franchise. If you buy a franchise, you’ll be following someone else’s system. This can have benefits if you’re moving into a new industry and don’t have experience. However, there are restrictions in franchising you should be aware of. These may include the franchisor deciding where you can buy the supplies for your business. Or the franchisor deciding how the marketing for the franchise system is done, and what your marketing money is spent on. It would be best if you thought about whether this will work for you.

2.Speakto those who’ve been there before

As part of every franchise sales process, you must be given something called a ‘disclosure document’ at least 14 days before you sign a franchise agreement. This document contains information about the franchise system and contact details of current and former franchisees. It is essential to make contact with a number of former and existing franchisees to get a realistic idea about the franchise. If you can’t easily get in touch with them (especially former franchisees), this should be a red-light warning, and you should not proceed to invest in that franchise system.

3. Get independent expert advice

Most people are optimistic that their business venture will succeed. You’ll be no

different. Getting independent expert advice (legal, accounting and business advice) will help you be realistic about the financial commitment you are about to make. The money you spend on advice should be proportionate to the cost (including debt) and the risk you are taking on.

As well as the three steps above there will be lots of other measures, you’ll need to take before you can confidently sign a franchise agreement.

Remember - it’s your money, so don’t be rushed.

Know your rights

Franchising is different from other business systems. It’s important to know what rights you have if you decide to buy a franchise.

A large part of the ACCC’s role is to help franchisees and franchisors understand their rights and responsibilities under the Franchising Code. We support a free online franchising education program provided by FranchiseED. This is a great starting point for prospective franchisees to learn about what’s involved with running a franchise business.

The ACCC has information available for franchisees, including details on the Franchising Code, FAQs, a manual for franchisees and factsheets, available on the ACCC website: www.accc.gov.au/franchisingcode

To keep up to date with events, court cases, changes to the law in the franchising sector you can sign up to the ACCC’s Franchising Information Network at www.accc.gov.au/fin

Anyone can contact the ACCC for further information about their rights under the Franchising Code.

What help can I get if things aren’t going well?

Franchise

businesses are not guaranteed to succeed and can underperform and sometimes fail, for a wide variety of reasons. Any business is at risk from changes in customer tastes, for example.

But if the franchisee is struggling because of poor practices by the franchisor that might be in breach of the Franchising Code or the Australia Consumer Law, you should seek help.

The first step is to try and resolve the issue with your franchisor. Under the Franchising Code, all franchise agreements must have a dispute resolution process, and franchisees can use this process. If this does not resolve the issue with the franchisor, a franchisee can then contact the Australian Small Business and Family Enterprise Ombudsman. The Ombudsman can provide information on the dispute resolution processes under the Franchising Code, options to resolve disputes and access to mediation services to franchisees and franchisors.

If the dispute can’t be resolved through mediation, the franchisee can consider getting legal advice and taking private legal action against the franchisor.

The ACCC does not get involved in individual commercial disputes. But if you think the issue in dispute is systematic and affects many franchisees in a particular franchise system, you should report it to the ACCC.

The ACCC does not take action on every issue reported, due to limits on resources. In deciding whether enforcement action is warranted, the ACCC is guided by its Compliance and Enforcement Policy and focuses on those circumstances that will, or have the potential to, impact vulnerable consumers, harm the competitive process or result in widespread consumer or small business detriment.

More information

There are existing resources available for someone thinking about buying a franchise, including:

A free online franchising education course www.accc.gov.au/about-us/tools-resources/cca-education-programs

Some short videos about key steps before buying a franchise, and key franchising concepts www.accc.gov.au/update/buying-a-franchise-know-the-risks

The information in this article is for general guidance only. It does not constitute legal or other professional advice, and should not be relied on as a statement of the law in any jurisdiction. As it is intended only as a general guide, it may contain generalisations. You should obtain professional advice if you have any specific concern.

Mick Keogh | Deputy Chair Australian Competition and Consumer Commission

www.accc.gov.au

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