Further review of the food franchise sector has revealed major shortcomings in the industry once again. The ACCC’s Disclosure Practices in Food Franchising report (August 2019) revealed that many of the issues associated with information sharing can be avoided during the early stages of a franchising partnership.
The report details some simple steps that can be taken to improve franchise outcomes. These guidelines not only help franchisors avoid breaching the Franchising Code and/or Australian Consumer Law but allow franchisees to make more informed business decisions.
It is amazing to see how many franchisees have jumped into what might be one of the biggest decisions of their lives without seeking advice or understanding exactly what they are getting into. Here are some tips and tricks noted in the report that are worth considering before signing up to a food franchise.
Obtain independent advice
Over 40% of prospective franchisees are not obtaining independent legal, accounting, and business advice before entering into an agreement. While not compulsory, seeking advice from a professional with experience is worth its weight in gold. Independent advisers can alert you to the risks and costs involved in running a franchise. Think of is as a very cheap insurance policy. It’s important to then take time to consider that advice before entering into an agreement. Ask questions and don't take franchisor information or advice on face value!
Seek and understand unavoidable costs
Franchisors are obliged to disclose payments a franchisee must make, such as rent, wages and inventory. This information must not be false or misleading (but it still might not be all that clear). If you are looking into a franchise, make sure you work through these details and numbers and properly understand what your business will need to turnover to be profitable. For example, creeping CPI increases over a number of years could chew up any forecast profits in the years ahead.
Know the types of goods subject to restrictions
Think again if you consider you'll be able to cut costs by sourcing produce from a cheaper supplier, or bump up your profit by upping your retail prices - you might not have that luxury. Some franchise deals require franchisees to buy produce or other goods from the franchisor's supplier of choice. Details of supply restrictions need to be outlined in a disclosure document and maximum retail prices need to be defined in the franchise agreement (and they should not be unfair). Again, if you are going to be a franchisee, understand what this will mean for your business.
Contact franchisees and get the low-down
The best way to obtain a realistic perspective on running a franchise is to talk to current and past franchisees. Franchisors should make contact details of former franchisees readily available.
Don’t go into a franchise blind. Do your homework and talk to your advisors before taking a big leap.