May 9, 2016

4 Key Rules for Your Franchise

We all tell white lies. From the innocuous ‘I loved that casserole’, to the relationship-saving ‘you look great in that dress’, everybody says things they don’t believe. But while this skill might be useful in everyday life, it’s an absolute no-go area in the franchise world. If you run a franchise, you have to be very careful about any statements you make to your franchisees, customers and to other interested parties in the franchise relationship.

Establishing a franchise is an exciting time for both parties. The franchisee is on the lookout for an exciting brand to associate themselves with, while the franchisor searches for a valuable new team member. The process is a bit like dating: you’ll probably meet up a few times and chat before jumping into bed together. But, like any new relationship, it’s important to push on the brakes if things get serious. You should be mindful of the expectations (and promises) you give to a new franchisee.

So, what should you be on the lookout for? Let’s lay down some ground rules.

Rule #1: Be Realistic

Never make promises or guarantees that you can’t keep. This is a good strategy for everyday life, as anybody with children can tell you. Nobody wants to over-promise and under-deliver. Be realistic in any predictions you make, and be clear that you can’t make any promises, especially about topics such as expected turnover. All franchisees will want the comfort of certainty, but at the end of the day the success of their business will depend on their own efforts.

Rule #2: Check Your Documents Carefully

Always make sure that your material is accurate, up to date, and that it doesn’t make any unsubstantiated promises. For example, don’t market a new franchise on the basis of a flat monthly fee if there are hidden fees attached. If you make a promise, have evidence to back it up and make sure it reflects the agreement between yourself and your franchisee.

If you don’t have a clear basis for one of your promises or statements, it’s simple – don’t make the promise. Otherwise, your franchisee may take legal action against you.

Example:

In 2014, the Federal Court found South East Melbourne Cleaning Pty Ltd guilty of contravening the Franchising Code of Conduct and the Australian Consumer Law. South East had provided its franchisees with a ‘franchise plan’, which claimed that franchisees could expect a certain volume of work per month. The Court found that South East had no reasonable basis to promise this, and fined them for making misleading statements. The franchisee was also entitled to be paid compensation.  

Rule #3: Make Disclaimers

If you’re entering into a contract with a franchisee, it’s a good idea to use disclaimers and a prior representation deed. These are very powerful tools, and can protect you from heartache in a lot of cases. However, even the most dazzling disclaimer won’t protect you if you don’t have good evidence to support your statements. In short; always put your money where your mouth is. It’ll save you from putting your money where the court is.

You should make it crystal clear that it is the franchisee’s choice to enter into the franchise, as well as encouraging the franchisee to seek independent advice. Deciding to enter the franchise must be the franchisee’s choice alone as to whether they believe the business will be viable.

Example:

In 2015, a class action by a group of Bank of Queensland franchisees failed. The franchisees argued that they were induced to enter the Franchise Agreement. However, the Bank of Queensland was able to defend itself because of its use of disclaimers. The bank had made it clear that applicants would need to accept risks, make their own enquiries and think carefully before becoming franchisees.

Rule #4: Act in Good Faith

Good faith is not just a moral standard, it’s also a legal requirement under the Code. A breach of the Code can land you in hot water, with penalties to the ACCC of up to $54,000 per breach and infringement notices of $9,000 per breach. Not to mention damages and compensation which can be awarded by a Court.

One of the bedrocks of franchising is brand consistency. How often have you walked into a fast food store, only to realise it looks exactly the same as all of the others? (The same goes for hospitals). On top of that, a lot of companies develop system-wide advertising campaigns for their franchisees. If this consistency appeals to you, we recommend reviewing your advertising campaigns. Not convinced it’s worth the effort? Well, you might change your mind after reading the following cases…

Example:

The Queensland Office of Fair Trading recently issued a $102,000 penalty to the Woolworths supermarket chain over vouchers they had mailed out in February 2015. The vouchers entitled consumers to 20% off ‘all meat products’. The vouchers caused a stir (fry) when customers tried to redeem them at the supermarket checkout. Woolworths claimed that the vouchers were for fresh meat only! They did not apply the vouchers to meat from the delicatessen, or to frozen meat. This would have been fine, except that there were no terms and conditions disclosing these restrictions on the vouchers.   

In 2015, the Federal Court found that the marketing of Nurofen was misleading and deceptive. The advertising for Nurofen featured a ‘specific pain’ range of products, each apparently targeting a specific area of pain (back pain, period pain, migraines and tension headaches). Unsurprisingly, these products were more expensive than the company’s standard Nurofen product. Perhaps less surprisingly, there was absolutely no difference between any of them. The ACCC found that all products in the ‘specific range’ had the same ingredients and formulation as the standard Nurofen product. If anything, the higher costs probably caused consumers more discomfort!

Conclusion

Transparency is key. From beginning to end, both franchisors and franchisees must ensure that they are honest with one another. Knowingly providing false or misleading information can not only jeopardise a business relationship, but can cause irreparable harm to respected brands.

In the end, if you act in good faith and provide evidence for any statements you make, you’re likely to avoid many of the pitfalls of a franchise relationship.

WARNING – This article is only meant to give you general information and should not be relied on as legal advice.  If you want more information, contact one of our solicitors.