What does the Franchising Code of Conduct really mean for franchisees?
By Jason Gehrke, Director, Franchise Advisory Centre
What is the Franchising Code of Conduct?
The Franchising Code of Conduct (the Code) is the national set of regulations that govern franchising in Australia. It has been in force since 1 July 1998 and has been amended and updated in one form or another nearly a dozen times in the last 25 years. (Even as this article goes to press, the Code is undergoing yet another review.)
The original intention of the Code was to regulate the behaviour of franchisors toward potential and existing franchisees, and this is still its primary purpose today, however it also has some elements which touch former franchisees as well.
How does it protect franchisees?
The Code seeks to protect franchisees from poor practices by franchisors which are incompatible with a healthy and mutually-beneficial franchise relationship. There are three main elements to the Code which are:
1. Access to specific information about the franchisor and the franchise opportunity that must be provided at least 14 days before a franchise agreement can be signed. This is known as Disclosure, and all franchisors must follow the same template for their disclosure document regardless of how big or small their network, and regardless of how young or old their brand. Since November 2022, franchisors have also had to list certain information about themselves on a government website called the Franchise Disclosure Register (www.franchisedisclosure.gov.au – see more details below).
2. The second primary element of the Code sets guidelines on what franchisors can and cannot do before, during and sometimes even after the franchise relationship has ended to protect franchisees from poor or exploitative behaviours.
3. The third element of the Code are processes for dispute resolution that can help resolve disputes more quickly, often at lower cost, and for generally quicker and more equitable outcomes compared to slow and costly litigation via the court system.
Who is responsible for enforcing the Code?
The Australian Competition and Consumer Commission (ACCC) has overall responsibility for enforcing the Franchising Code of Conduct. The ACCC can receive and investigate complaints from potential, existing or former franchisees. It can also impose fines for relatively minor breaches of the Code, or seek more substantial penalties through the courts for serious and potentially deliberate breaches of the Code.
The ACCC has produced various information resources for potential and current franchisees and franchisors to help better understand the Code, including a compliance guide (for franchisees) and a free online course for potential franchisees (see below for more details).
What do potential franchisees need to know about the Code?
The Code protects existing and potential franchisees from poor behaviour in the franchise relationship. Every potential franchisee should know that the Code exists for their protection, but also to focus them on having access to better information about a franchise investment, and a better understanding of franchising more broadly before signing a franchise agreement.
The Code does not absolve franchisees of the responsibility to undertake their own due diligence before investing in a franchise. Nor does it absolve franchisees of the obligation to adhere to the terms and conditions of the franchise agreement (assuming it complies with the Code), simply because the franchisee later decides they don’t like certain clauses.
The Code does not cover every possible instance of poor behaviour that might cause difficulties in a franchise relationship. Neither does a franchisor’s compliance with the Code guarantee that a franchisee will have a profitable and rewarding business, as the Code only regulates conduct in franchise relationships, and not the commercial outcomes of the relationship itself. There is a risk involved in any business venture, and while a franchise mitigates those risks, it can’t eliminate risk altogether.
Early proponents of the Code argued that it would give people greater confidence to invest in a franchise, and that the franchise sector in Australia would grow as a result. While the sector has grown since the Code was introduced, there is no evidence that the existence of the Code has led to the franchise sector in Australia growing at a rate any faster than in countries such as the United Kingdom and New Zealand which do not have any kind of national franchise regulations.
Information overload?
There is generally a very low level of awareness of the Franchising Code of Conduct among potential franchisees in Australia. Most only learn about the existence of the Code some time after they have started their search for a franchise, and often only at a very late stage of the process when they receive an Information Statement or a copy of the Code from a potential franchisor along with a disclosure document and franchise agreement for signing. (By law, franchisors must provide a copy of the Code with these other documents).
As a result, a potential franchisee may easily feel overwhelmed at the sheer volume of documentation they receive. Although most reputable franchisors will require franchisees to get legal advice before signing a franchise agreement, there is no reliable data to indicate that potential franchisees will actually read the documents for themselves, although anecdotally less than 10% may actually do so.
The Code itself is a document of 106 pages from start to finish, but this includes 16 pages outlining the template for a disclosure document (which the franchisee should receive anyway, but filled with relevant information about the franchisor and the franchise offer), plus around a dozen other pages including a table of contents, endnotes, and a table outlining the history of amendments to the Code.
Meanwhile, the Disclosure Document might be up to 70 pages, and the franchise agreement itself could run to more than 100 pages, which, combined with the Franchising Code could result in potential franchisee being confronted with around 300 pages of information (plus anything else required to be provided, such as a copy of the lease of the premises from which the business will operate).
The sheer volume of information provided, plus the legal language in which it is written can be challenging for even the most enthusiastic reader to digest, and has often led to claims that potential franchisees are overloaded with too much information before buying a franchise. Even if this was true, providing potential franchisees with less information upfront is not possible under the Code, and so potential franchisees must make the effort to work through the volume of information they are given.
Start at the beginning and rush slowly
The journey to becoming a franchisee will be different for different people.
Some people start their journey subconsciously as customers of a brand, then later decide they like the products or services so much that they can see it as a business opportunity for themselves and make inquiries accordingly. Usually this means they focus on just the one brand during their franchise journey.
Other people come to franchising in response to a desire to work for themselves in an industry they already know, or a completely new industry altogether. Unlike the enthusiastic customers who may only consider one brand, the potential franchisees driven by a desire to be their own boss may instead look into two or three different brands simultaneously (especially as there are so many different franchises across so many industry segments now operating in Australia).
In the first instance, a potential franchisee may visit the website of a franchisor, then perhaps Google additional information about their franchise offer, or visit various online commercial directories.
However, since November 2022 another highly useful information resource that allows potential franchisees to compare one franchise against another is the Australian Government’s online Franchise Disclosure Register at www.franchisedisclosure.gov.au
Figure 1: The home page of the Franchise Disclosure Register at www.franchisedisclosure.gov.au
The Disclosure Register website is a free public information resource developed by the Australian Government to allow potential franchisees to more easily compare franchise offers. It does not have pop-up ads, animated gifs or videos unlike privately-operated online franchise directories.
Potential franchisees will need to click on the Search button on the front page of the website, then agree to the Terms of Use before proceeding.
The user will then land on a page that might look like the following:
Figure 2: The search page of the Franchise Disclosure Register
The Register lists every business that offers franchises in Australia, even if they are franchisors and master franchisees of the same brand (eg. XYZ Franchisor Australia Pty Ltd, and a state master franchisee – eg. XYZ Queensland Pty Ltd – as the franchisor may offer franchises in states other than Queensland, where another company has the right to grant franchises).
Because the Register lists all businesses that offer franchises, there are far more listings on the register (1,719 as at the time of writing this article). After allowing for multiple listings for brands which operate via master franchises, there are about 1,200 different franchise brands listed on the Register.
The Register classifies brands according to the ANZIC (Australian and New Zealand Standard Industrial Classification) categories for businesses used by the Australian Bureau of Statistics, with a major classification heading followed by a sub classification heading to help narrow down the search results. (This includes classifications in which no franchise businesses operate, such as Mining). A search for a franchise opportunity can be further refined to include states or territories in Australia where the brand currently operates, or where it intends to grow.
Some classifications may not be immediately apparent and need patience to find. For example, a potential franchisee interested in a fitness business would need to select the main industry division of “Arts and Recreation Services”, and then a subdivision of “Sports and Recreation Activities” to shortlist around 85 results.
The Register also includes the ability to search by brands which have provided their Disclosure Document, however as it’s voluntary for franchisors to provide this document and the document itself often contains commercially sensitive information, only a very small number of franchisors have provided this information (less than 4% of all listings as at the time of writing).
Once a user has identified a listing of interest, clicking on it will provide more details about the franchisor and the franchise offer, including:
- The number of years it has been operating;
- How many franchised and corporate outlets exist;
- The states in which it operates or intends to expand;
- The anticipated setup cost for a new franchise;
- Fees and royalties payable under the franchise agreement;
- The length of an initial franchise term;;
- Contact details for the franchisor and other basic information about the franchise.
The listing should also include a link to download the franchisor’s Key Facts Sheet (ie. a template summary of information about the franchise offer to be read alongside the Disclosure Document), and may also include links to download their disclosure document and standard form franchise agreement (if these have been provided to the Register as it is not compulsory to do so).
What is the Information Statement and online course?
The Information Statement for Prospective Franchisees is a government-mandated five-page handout containing generic information about franchising that must be given by franchisors to potential franchisees as soon as possible after receiving an initial franchise inquiry.
The purpose of the Information Statement is to alert potential franchisees of the sorts of questions they should explore when considering a franchise, provide an overview of the process, and provide details of additional sources of information such as the free online course for potential franchisees at www.accc.gov.au/franchising-education-program.
This free course is an updated version of one launched in 2010, and which had been undertaken by more than 20,000 potential franchisees before its recent relaunch. It takes only 90 minutes to complete but provides vital insights for potential franchisees to consider before committing to a franchise. Australia was the first country in the world to offer a free online course for potential franchisees, and set a precedent which several other countries have since followed.
What next?
If you are seriously considering investing in a franchise, be sure to learn as much as you can about franchising before signing on the dotted line. Links to all the resources mentioned in the is article, plus additional resources can be found online here: https://www.accc.gov.au/by-industry/franchising
Other useful online resources include:
This is an Australian government website full of tips and tools for new and existing small business owners.
www.franchiseadvice.com.au/best-practice-for-franchisees/
The Franchise Advisory Centre has an online library of more than 50 advice articles for potential franchisees. Its regular interactive online course Introduction to Franchising (www.franchiseadvice.com.au/introduction-to-franchising/) is also very useful for potential franchisees to rapidly increase their understanding of franchising and small business, including how to avoid common mistakes.
The last word
Finally, just take your time. You should never rush into a potentially life-changing decision. The more effort you put in to researching your proposed franchise investment, as well as franchising and small business more broadly, the more likely you are to avoid unpleasant surprises along the way, and to enjoy a profitable relationship with your franchisor.
As a rule of thumb, consider taking up to an hour of your time on research and self-education for each $1,000 to be invested. It might feel like this initially slows things down at the start of your franchise journey but it will be worthwhile to know that you have gone into business with your eyes wide open and have given yourself the greatest possible chance of success.
Jason Gehrke | MBA CFE | Director | Franchise Advisory Centre
Jason has more than 30 years’ experience in the franchise sector and is the founder of the Franchise Advisory Centre, and publisher of Franchise News, Australia’s leading email news bulletin on franchise trends and issues.
He is an experienced non-executive director of franchise brands, as well as past chairman of the World Franchise Council and past board member of the Franchise Council of Australia.
Jason is also a longstanding member of the ACCC’s Small Business & Franchising Consultative Committee. He teaches best practice in franchising to both franchisors and franchisees, and has delivered franchise education throughout Australia, as well as New Zealand, the United States, Canada, the United Kingdom and the Philippines.