HOCW’s Franchise Series – Guidelines for franchisors – make compliance part of your promotional strategy

Monday September 26, 2022

HOCW’s Franchise Series – Guidelines for franchisors – make compliance part of your promotional strategy

Last month’s article, ‘Three steps to take before you commit to a franchise agreement’, focussed on encouraging prospective franchisees to test before they invest and make a commitment to a long-term franchise relationship.

Our focus now turns to the franchisor, and what you should be doing from the outset of your dealings with prospective franchisees.

The pressure to grow

The success of a brand – rightly or wrongly – is frequently measured by the number of franchisees it has within its network and whether that number is growing year on year.

It is evident, however, that the pressure to recruit franchisees has also resulted in many franchisors contravening the Australian Consumer Law. There are numerous examples of franchisors engaging in misleading or deceptive conduct, unconscionable conduct, and conduct contrary to the Franchising Code of Conduct (Code), during negotiations with prospective franchisees. The costs of their contraventions have drastically outweighed the perceived benefit received. Penalties that have been imposed have resulted in the liquidation of some franchisors and the bankruptcy of their directors. Those franchisors that survive the imposition of penalties have less funds to devote to their franchise network and, in our view, now face a snowball of legal exposure from their existing franchisees as a result.

Managing the risk

The undeniable lesson from those that have got it wrong is that selling franchises in Australia is a process of balancing self-promotion with self-preservation.

The following guidelines apply to all franchisors, irrespective of their structure, industry, or how long they have been in the game.

  1. Pressure test - consider whether your marketing material, website, social media, disclosure documentation and the communications that you and your staff are making to prospective franchisees contain any material that may be misleading or deceptive

We (hopefully) don’t need to tell you not to lie to potential franchisees. However, you can still be guilty of engaging in misleading or deceptive conduct even if you did not intend to mislead or deceive an individual.  This is a complex area as there are numerous ways that you can be found guilty of misleading or deceptive conduct. For example, without limiting the ways you might engage in misleading or deceptive conduct, you might create a false impression by using language that might have multiple meanings, you might accidentally fail to update a prospective franchisee of a change to your business that occurs during the negotiation process, you might inadvertently pass on information from a third-party, information that is false. Even the ‘context’ in which conduct occurs can be a determining factor of whether conduct is misleading or deceptive. 

Given the complexity of this area, we consider that it makes sense to obtain an objective view on whether your messaging to prospective franchisees may be misleading or deceptive. We can assist in this regard. We can also provide you with advice on how you might manage the communication of information to a prospective franchisee in a given context.

  1. Ensure that you are providing Code compliant documentation on time

Did you know that you risk a penalty of up to $133,200 if you do not provide a copy of the ‘information statement’ appearing on the Australian Competition and Consumer Commission’s (ACCC) website to a prospective franchisee within seven days of them formally applying or expressing an interest in acquiring a franchised business?

You should ensure that you implement a process whereby you can readily comply with this obligation irrespective of whether you think that person will invest in your franchise.

Compliance with time frames under the Code and ensuring that you provide compliant documentation to prospective franchisees instils confidence that you take your obligations as a franchisor seriously. We would suggest this serves both the self-promotion and self-preservation objectives.

We regularly assist franchisors to ensure that they comply with the time frames prescribed by the Code and that their document is compliant.

  1. Be willing to negotiate terms of your franchise agreement

A willingness to negotiate provides scope for you to understand more about the prospective franchisee and what is important to them. Negotiating some terms of a franchise agreement may also be a necessary process to undergo to mitigate the risk of having a term declared void as an ‘unfair’ contract term.

We can assist you with this process and advise you on the Unfair Contracts Regime, generally.

  1. Treat your current franchisees well and let them know that it is okay to speak with prospective franchisees

Prospective franchisees are encouraged to speak with current franchisees of a brand during their due diligence process.

Make sure that your current franchisees feel comfortable in describing what we hope is an honest and positive story to these prospective franchisees about you as a franchisor.

It is not too much of a stretch to imagine that some franchisors might try to influence this process to frustrate or impair a prospective franchisee contacting a current franchisee to get the ‘real’ story. We consider that there is no longevity in this approach and that such conduct may be in breach of obligations under the Code to act in good faith towards a prospective franchisee.

Selling your brand at expense of compliance with your obligations is not worth it. It is imperative that you consider compliance with your legal obligations a key part of your promotional strategy.

Please contact our Commercial Lawyer, Vincent Caruso if you have any questions about this month’s article.

Next month we will consider the Franchisor Disclosure Register and some of the implications for franchisors and prospective franchisees.