The compliance review also found nearly half of prospective franchisees did not get any independent professional advice.
Franchisors in the food services sector are “commonly providing inadequate information” to potential franchisees, according to the Australian Competition and Consumer Commission (ACCC).
In its Disclosure practices in food franchising report, the commission revealed that around one in three franchisors are “failing to consistently disclose useful contact details of former franchisees.”
“Our compliance review identified that some franchisors are making it difficult to contact former franchisees by failing to disclose basic information such as email addresses or mobile phone numbers,” ACCC deputy chair Mick Keogh said in a statement.
“Our message to someone thinking about buying a franchise is to walk away if you can’t easily contact former franchisees. You won’t get a realistic picture of the business without talking to them.”
The ACCC reviewed disclosure documents from a sample of 12 franchisors in the food services sector and found that many were “problematic.” The compliance review also found nearly half of prospective franchisees did not get any independent professional advice before buying a franchise.
Under the Franchising Code, seeking independent legal, accounting and business advice is strongly recommended but remains optional.
“The message for prospective franchisees is that the costs of setting up and running a food services franchise can amount to hundreds of thousands or even millions of dollars. If you aren’t setting aside the time and money to do proper due diligence, then you should reconsider franchising altogether, as you risk investing in failure,” Keogh added.
The compliance review also found many of the franchisors did not “clearly” disclose what essential goods were subject to supply restrictions.
“To comply with the Code, franchisors need to explain the detail of any supply restrictions. This ensures someone buying a franchised café, for example, knows whether they can shop around for coffee beans,” Keogh explained.
Other findings from the review include that one third of the franchisors did not “adequately disclose key unavoidable ongoing costs”, such as wages, rent or inventory.
“The poor disclosure by some franchisors of wages, rent and inventory costs is particularly concerning given how essential these are to running most businesses,” Keogh said.
The ACCC says it is continuing to assess each trader’s individual compliance, including whether any enforcement action may be warranted.
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