Buying a Franchise: ACCC Profit Warning

Investing your money on a franchise doesn't guarantee success. In fact, you should be careful when buying a franchise because the number of franchisors making false claims about potential income is increasing, warned the Australian Competition and Consumer Commission, an independent watchdog that monitors illegal anti-competitive behaviour.

The ACCC is currently investigating a number of franchisees who claim to have been promised a minimum income, but made minimal or no income from their franchise. Acting ACCC chairman Michael Schaper noted that while most franchisors do the right thing when dealing with their franchisees, there seem to be an increasing number that are misleading people.

Targeting non-English speakers

"Franchisors must have a reasonable basis for making all income representations to potential franchisees," said Schaper. "The ACCC is particularly concerned by franchisors which appear to target people from non-English speaking backgrounds who may not fully understand the agreements they are entering into."

Jason Gerkhe, director of the Franchise Advisory Centre, suggests that potential franchisees shouldn't enter a franchise only because of its guaranteed income, because more franchisors are now using income guarantees as a lure in recruitment. Gerkhe recommends that people should still look at the recruitment incentives like income guarantees, but these should only be part of the entire decision-making and not the only reason.

Franchisors that deceive people about a franchise's potential income are subject to litigation and penalties worth up to AU$1.1 million for every violation.

Tips in buying a franchise

Here are a few tips to help you out when purchasing a franchise:

  • Be wary of income guarantees and seemingly get-rich schemes that promise sizeable amounts of profit with little effort. Remember: there is no such thing as easy money. If the income sounds too good to be true, it is.
  • If the franchisor verbally promises guaranteed income, ask him or her to back up the assurances in black and white. If a franchisor refuses to provide you documentation of his or her guarantees, they may have given you a false claim.
  • If you receive any offers from any franchisers, see to it that you investigate the franchise first. Do this by asking previous and current franchisees about their experiences in dealing with the franchiser. Their contact details are normally provided in the franchise disclosure agreement.
  • Consult an accountant and attorney about the franchise. Make sure your lawyer reviews the offer and your accountant goes over the franchise's financial statements. Take note that investing in a financially unstable franchise is risky as the company could go out of business after you have put in your money.
  • Know your rights. As a franchisee, you may terminate an agreement within seven days of entering one or making a payment under an agreement, whichever happens first. When this happens, the franchisor is required to refund all your payments within 14 working days, minus any other "reasonable" expenses in the agreement. However, there's no cooling-off period if you're dealing with a transfer, renewal or extension of an existing franchise agreement.