Under Australian Law all Franchisors and Franchisees are required to comply with the Franchising Code of Conduct (FCC).
Franchising Code of Conduct
As franchising continues to increase in popularity, it is essential that both Franchisors and Franchisees understand their rights and obligations. In particular, the issue of accurate income forecasting is an area where costly disputes can easily arise.
A Franchisor is not obliged to disclose specific franchisee earnings or any earnings information at all.
Reasonable grounds for making the forecast
It is a requirement of the FCC that if a Franchisor opts to provide any earnings information, any information provided must be based on reasonable grounds. In addition, where an earnings forecast is included in the disclosure document (Disclosure Document) then the Franchisor must advise:
• Any facts or assumptions on which the forecast is based;
• Details of the research undertaken and the extent of any enquiries made to support the forecast;
• Whether the forecast includes any costs or write offs such as depreciation of assets, salary or wages for the franchisee, the cost of meeting any loans on the business (for example interest and repayments); and
• Any assumptions built into the estimate regarding tax obligations.
Variables such as the location of the new franchise, the demographics of the area covered by the franchise agreement, estimated turnover, lead time for generating income, training requirements and a range of other factors may all affect whether an earnings estimate is likely to be accurate.
What does it mean if a forecast turns out to be inaccurate?
Any Franchisor who knowingly or recklessly makes a false or inaccurate forecast without any regard for the likely accuracy of the forecast or where they are in possession of information which is contrary to the predicted outcome is likely to be found to have engaged in false and misleading conduct.
ACCC v Geowash – a case study
The ACCC successfully prosecuted former hand car wash and detailing franchisor Geowash in the Federal Court for acting unconscionably, making false or misleading representations, and failing to act in good faith in breach of the FCC in relation to the sale and marketing of its franchises.
In a decision handed down on 8 February 2019, the Federal Court found that Geowash made false or misleading representations on its website under the heading ‘How much money can I make‘ to prospective franchisees that they could make monthly average sales revenue of $70,216 and gross average profit of $30,439, when it had no reasonable basis for this claim.
In his judgment, Judge Colvin made the following statements:
• Information concerning average returns that might be earned by a franchisee concern quantifiable financial data. For the audience to whom they are directed, they create the impression that the information is accurate and has a proper basis;
• The figures were presented under a heading ‘How much money can I make‘. In that context, they conveyed the impression that the average earnings as presented contained accurate financial information that indicated what an average leading Geowash outlet might be expected to earn by way of revenue and profit each month. Plainly, the figures were not of that character;
• The claims by the ACCC concerning the contravention of s18 and s37(2) of the ACL by engaging in the conduct that involved the making of the revenue representation and the profit representation by Geowash should be upheld. They were representations as to what the actual average monthly revenue and profit was for a leading franchise. In fact, the figures were not of that character. Further, they were presented as a basis upon which a view might be formed as to what a franchisee might earn. Having regard to the nature of the actual information which formed the basis for the statements made it has been affirmatively demonstrated that there were no reasonable grounds for the representations made insofar as they were with respect to future matters.
A hearing to determine penalties and other orders sought by the ACCC will be on a date to be fixed by the Court.
The maximum penalty for a breach of the Franchising Code is currently $63,000.
The maximum penalty for a breach of the ACL was recently increased to the greater of $10 million, or three times the value of the benefit obtained, or 10 per cent of annual turnover in the preceding 12 months if the value of the benefit cannot be determined.
“The Court’s decision sends a strong warning to franchisors about the serious consequences of failing to comply with their obligations under the Franchising Code and Australian Consumer Law,” ACCC deputy chair Mick Keogh said of the ruling in a statement.