Franchise code offers clarity on risky issues

Mutual benefits

A national Franchising Code of Conduct came into force last month, ensuring greater protection for franchise owners against confusing contracts and unscrupulous corporates.

WA MP Peter Abetz, who has staged a four-year campaign for stronger regulations, said it was a long overdue change that would save many small business owners from bad deals.

Mr Abetz said the national code was stronger than his Franchising Bill, which failed to win support in State Parliament several years ago amid fears of government intervention.

A key protection in the code, to be regulated by the Australian Competition and Consumer Commission, is an obligation for both parties to act in good faith.

It is backed up by new penalties of $8500 for a company and $1700 for an individual, with court- ordered penalties of up to $51,000.

WA Small Business Commissioner David Eaton said the code ensured contractual certainty over some emerging problems, such as online sales.

Mr Eaton said some contracts failed to outline which party collected the profits from online sales in specific areas, given franchisees had traditionally had exclusive sales rights in set geographic areas.

He said the code would also ensure clarity by forcing franchisors to disclose how marketing funds were spent.

Former franchisee Michael Tandean said the code could have saved him and his wife from losing their $700,000 life savings in two failed fast-food ventures.

Mr Tandean said they had been naïve when buying businesses a few years ago but could have been alerted to potential problems by the new requirement for franchisors to disclose general risks.

“We had a 10-year plan to own three shops . . . but we are walking away with nothing, ” he said.

Reece O’Sullivan, who runs Finn Franchise Brokers in WA and a Coffee Club franchise, said the regulations would ensure certainty for both corporates and franchisees.

Mr O’Sullivan expected it would help boost the popularity of the business model.

He said the code would protect buyers who did not properly scrutinise contracts before signing them.

“There is a belief among some people that if they are buying a franchise, then the deal must be all right, ” Mr O’Sullivan said.

“The code will make sure franchisors are not misusing this trust, but it will also help franchisors by strengthening the whole industry.”

NEW REGIME

Franchising Code of Conduct which has taken effect as of this year:

- An obligation for parties to act in good faith

- Greater transparency about how franchisee marketing funds are used by the group

- Mandatory disclosure as to whether franchisees get a cut of profits from online sales in their area

- Infringement notices of $8500 for a company and $1700 for individuals and other entities for breaches

- Court-ordered pecuniary penalties of up to $51,000 for breaches of the penalty provisions

- An obligation for franchisors to provide prospective franchisees with information outlining the potential risks of franchising