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Addressing the franchise industry power imbalance

Business

South Australian franchisees are keenly awaiting a shake-up of the industry’s code of conduct which are expected to tip the balance of power back towards their favour, writes franchise law expert Megan Jongebloed.

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A raft of proposed changes to the Franchising Code of Conduct, including additional disclosure obligations for franchisors, are currently being considered by the Federal Government.

The proposed changes are almost exclusively for the benefit of franchisees, and harsher penalties will apply to franchisors who do not comply with obligations under the code.

If passed, they are expected to come into effect from July 1 this year.

The new rules of engagement will have a significant impact on a key industry in the South Australian economy involving global and national brands, small business owners and many thousands of employees.

The back story

In 2019, a Parliamentary report into Australia’s franchise industry found the current regulatory environment did not deter systemic poor conduct and that exploitative behaviour had entrenched the power imbalance between franchisors and franchisees.

One of the main reasons why a franchised business fails is due to the inability of a franchisee to meet the various financial commitments during the lifecycle of their franchised business.

Such financial commitments include rent for the premises, fit-out costs, purchase of goods, employee costs and refurbishment costs.

One of the ways in which franchisees can be better prepared to meet these financial commitments is to ensure that there is more detailed and robust disclosure to franchisees prior to commencement of the franchise.

In response, the Australian Government’s Franchising Taskforce outlined a revised Franchising Code of Conduct that included additional disclosure obligations on franchisors, as well as other changes which will prevent franchisees from incurring unexpected legal costs or capital expenditure costs.

What changes are in store?

Disclosure obligations

Costs and cooling off

Be prepared

Many of these proposed changes aim to help franchisees make more reasonable and informed assessments of the value of and cost to run a franchise before entering into a contract with a franchisor.

This is to ensure that a franchisee is able to make a fully informed decision as to whether or not they should proceed with the franchise and to avoid any nasty costly surprises down the track.

The practical issue for franchisors is being able to identify and accurately estimate the likely costs prior to commencement of a franchise, particularly in circumstances where the term of the franchise is likely to be five years or more.

While this reform represents a greater administrative and compliance burden on franchisors, it is hoped that by building greater transparency and accountability the industry as a whole will benefit.

However, as with any reform, much of the devil is in the detail and there are significant penalties for non-compliance of which to be aware.

It’s vital therefore that both franchisors and franchisees seek professional legal advice to ensure they understand their obligations and rights, and are well prepared before any changes take hold.

Megan Jongebloed is Head of Cowell Clarke’s Franchise Law Group.

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