Last month, a coffee shop chain business transaction failed because the Franchisor issued a new franchise agreement for three months, which greatly undermined the buyer’s confidence and decided to withdraw. This Franchisor must have some problems, but he gave a reason that the franchise business management regulations will be implemented on July 1, so he must be careful. Recently, there are not many things in Lockdown, so I decided to study what changes this regulation has and make him dare not do business.
In recent years, franchise businesses have been widely criticized, and many people are scared when they talk about franchise. The problems that have been criticized are basically concentrated in several aspects: too many miscellaneous fees (marketing, legal costs, decoration), and they are not transparent; unclear lease terms, opaque purchase prices; unclear procedures, always feel cheated, etc.
According to these points, the government has done some practical things, which can be regarded as a remedy. The Franchising Code of Conduct was revised and became effective on July 1, 2021. For details, please see the official website Franchising code of conduct | ACCC. Here we will share the modified and updated content with everyone, which will be helpful for both Franchisor and Franchisee.
- Before providing the Franchise agreement and Disclosure Statement, the Information Statement, Key Facts Sheet, and lease must be provided to the franchisee. This Information Statement is basically a warning document, telling you what rights and obligations you have as a franchisee and what risks you have. The Key Facts Sheet is basically a simplified version of the Disclosure Statement. The Franchisor must disclose who he is, what business disputes he has, who the current and past franchisees are, what products and services he can provide to franchisees, how much money he needs to operate this business, and how to handle the agreement after it expires. With these documents, franchisees can have a rough idea.
- Regarding the issue of spending money, one is legal cost, the other is marketing fund, and the third is significant capital expenditure. These three points require clear requirements, and they must be specified in the disclosure statement in advance. Regarding legal costs, only those that are pre-specified in the agreement and have a clear amount displayed can be paid by the franchisee for legal costs related to the preparation, negotiation, and execution of the franchise agreement. Regarding the marketing fund, please note that it is not just advertising, but the definition of marketing is broader, and the marketing fund needs to be regulated. The fund supervisor needs to prepare financial reports, carefully explain where the money is spent, and whether most franchisees agree; a special bank account needs to be set up to manage the marketing fund, which is a bit like a trust account; if the management is not good, it will be fined and bear civil liability. The third is significant capital expenditure. Although there is no definition of what significant capital expenditure is, it is obvious that spending a lot of money must be agreed by most franchisees in advance, and how to spend and what benefits are gained must be clearly stated. This has also become a certainty for franchisees.
- Disclosure responsibility for lease and other benefits. Mainly about two aspects, one is the lease and the other is the supply discount. The Franchisor must provide the original lease, and if any additional benefits are obtained from the lease, they must be disclosed to the franchisee. Some Franchisors have taken the landlord’s decoration subsidies or other rent rebates related to the lease but did not tell the franchisee, which is now clearly not allowed. There is also the issue of supply. Due to the supply restrictions of the franchise agreement, franchisees may only be able to purchase some products from the headquarters, but if this price is higher than the market price and affects their competitiveness, this transaction is unfair; not to mention the headquarters holding the supplier’s rebate and not giving it to the franchisee, eating enough by themselves, and letting franchisees work hard and earn no money, which is also illegal.
- Issues related to dispute resolution mechanisms. One is to be resolved internally by both parties according to the terms of the franchise agreement. If it cannot be resolved, you can apply to the government agency (Australian Small Business and Family Enterprise Ombudsman) to provide third-party mediation. If the mediation fails, you can apply for arbitration. If the arbitration fails, you can only go to court. The government has become the referee of administrative arbitration. Everyone knows that going to court is time-consuming and expensive. If there is government adjustment and arbitration, it will be much simpler. Another point is that franchisees can apply for joint mediation and arbitration for the same issue, and the cost is shared by both parties, which is a bit like a group fight.
- The article discusses the implementation and effectiveness of a new policy related to franchise agreements. The policy came into effect on July 1, 2021, and is applicable even to franchise agreements signed before this date in case of disputes. Franchisors are required to update the disclosure statement by November 1, 2021, and subsequently update it within four months after the end of each fiscal year. This entails a significant workload and responsibility.
After reviewing these new regulatory provisions, the author expresses astonishment and suggests that making money through franchise opportunities seems challenging. The policy appears to place franchisors in a relatively vulnerable position, emphasizing strong protection for franchisees. The author notes that some business owners, without fully understanding the management level required or the business and legal risks involved, might have previously considered franchising as an easy path to success, like going public. However, the new regulations reveal a stark contrast to this perception.
The article advises against venturing into franchising without the management expertise of major fast-food chains, genuine high-quality products and service standards, and a clear understanding of business and legal risks. The author compares it to the responsibility placed on apartment builders, suggesting that opting for a smaller business might be a more prudent choice. The advice is for individuals to focus on their small businesses, expanding independently or in partnerships, but to approach franchising cautiously.
For those aspiring to become franchisees, the article highlights the ample legal protection available, providing a sense of security and confidence when dealing with the franchisor. However, it emphasizes that, regardless of government protection, all businesses involve risks. Franchising, in essence, is still a risky venture, and the key to success lies in self-reliance, continuous improvement, and honing one’s skills.