New, stricter regulations for Australian franchises
Earlier this year, following a series of negative comments in Australian media about franchising industry, the Parliamentary Joint Committee on Corporations and Financial Services completed an inquiry into the operation and effectiveness of the Franchising Code of Conduct.
As the result of the inquiry, the Committee released the “Fairness in Franchising” report.
On a broad scale, the Report recommended:
- stronger, tougher regulation of the franchising industry
- new and higher penalties for breaches of the Code
- more responsibilities and greater enforcement power for the ACCC
Not all the recommendations have been welcomed by the industry with noticeable controversies and stir among the insiders.
Regardless of the reactions the Report had generated, we believe significant changes to Australia’s franchise laws are coming.
Let’s look at some of the key recommendations made by the Committee:
Franchise Termination Rights
A franchisee may terminate a franchise agreement without liability to the franchisor where:
- a franchisee suffers personal hardship or is over-geared and unable to restructure their finances or sell the business under the assignment provisions of the Code; or
- a franchisee’s EBITDA has been negative for three fiscal quarters, the franchisor would be responsible for meeting the terms and conditions of breaking any third-party leases.
Stricter Disclosure Obligations
It is a common practice among many franchisors not to disclose earning information, at least not in writing, to incoming franchisees. Instead, they prefer to use general market data or inform them verbally about the state of the business.
To stop this, the Committee recommended franchisors to provide incoming franchisees with a profit and loss statement, balance sheet, previous two years’ business activity statements and an assessment of labour ...