ISSUE 20 NOVEMBER 2006

State of the sector— maturing and growing

Mediation—how doesit work?

Territories—how closeis too close?

FRANCHISING:Is it right for you?

© Commonwealth of Australia 2006

ISSN 1443–0681

Produced by the Publishing Unit 11/06.

EDITORIAL

Franchising has been one of the stars in Australia’s booming economy, and continues to draw attention as one of the most successful ways for small businesses to compete in the marketplace.

Issues such as a tight labour market, changing social trends and a general maturing of the sector continue to present both challenges and opportunities in Australia.

Since the introduction of the mandatory Franchising Code of Conduct in 1998 there has been a growing culture of compliance with the laws governing franchising.

The introduction of the code has led to a maturing of the franchising sector in Australia and a greater understanding of both the rights and responsibilities of franchisees and franchisors.

It is now eight years since the code was introduced, and the challenges facing franchising operators have changed with the sector.

The Australian Government is currently reviewing the disclosure requirements of the code. It has taken submissions from hundreds of franchisees and other interested parties keen to ensure the legislation remains relevant and responsive to the needs of all that work in franchises.

Putting the disclosure provisions under the microscope allows industry, government and regulators to refocus on issues that need to be addressed and test the status quo. Hopefully the result will be an even better model, if indeed changes are required.

An effective, functional code allows its administrator, the Australian Competition and Consumer Commission, to fulfi l its key role in the area—protecting competition, and ensuring vulnerable businesses and consumers are protected from unconscionable and misleading conduct.

It is also a good opportunity to increase awareness of the risks and obligations of all involved, and to remind those thinking of becoming franchisees or franchisors of the right way to go about it.

Constantly reassessing and fi nding ways to improve conditions for small and medium-sized franchise businesses will not only benefi t the individuals involved, but more importantly their customers, the Australian public. Something we would all welcome.

ISSUE 20 | NOVEMBER 2006

ACCC UPDATE NO. 20 PAGE 3

Editorial ......................................................................2

Making the cut ............................................................4

Rents under pressure .................................................6

State of the sector: maturing and growing ..............7

Franchising start-ups ..................................................8

Skills shortages .........................................................10

Setting the boundaries .............................................11

In for the long haul ..................................................12

Mediation ..................................................................14

Jargon buster: disclosure .........................................14

Franchisee start-up checklist ...................................15

Franchise scams ........................................................16

Latest small business and

consumer publications .............................................17

What’s in a name? ....................................................18

ACCC contacts .........................................................19

FRANCHISING START-UPS

From computers to hair cuts—John Longmire’s franchising sea change

COVER STORY

CONTENTS

8

FRANCHISOR FEATURE

124

PAGE 4 ACCC UPDATE NO. 20

FRANCHISEE FEATURE

John Longmire wouldn’t be the fi rst man to grumble about the cost of his partner’s haircuts.

But when his wife Monica came home complaining of being charged $20 for a simple fringe trim, it got the pair thinking there might just be a business opportunity for them in the sector.

‘I was looking through a franchising magazine one day and saw this opportunity. I said, “Look, you can get a whole hair cut for $12” and it sort of went from there.’

Grabbed by the concept of budget cut-only salons, the pair embarked on a long journey towards becoming franchisees which culminated in them opening the fi rst ACT Just Cuts salon in Belconnen, in 1994.

It was a big call for the Canberra couple, neither of whom had hairdressing experience, with Mr Longmire walking away from a 15-year career as an AusTrade IT specialist.

In the initial phase Mr Longmire continued to work his full-time job while studying business management and marketing part-time. Mrs Longmire also worked part-time as a social worker while studying.

Not having been in business before, franchising seemed to offer the ideal step from paid employment to working for themselves.

After success with the fi rst store, the couple expanded to running fi ve salons in the ACT as part of a long-term plan, before scaling back to two stores.

MAKINGTHE CUT

FRANCHISEE FEATURE

ACCC UPDATE NO. 20 PAGE 5

Mr Longmire believes one of the reasons he was able to succeed was dedicating time to ensuring the business was running properly.

‘We worked very hard to create what we have. It’s also a matter of being focused. I use a technique called chunking—allocating different blocks of time to tasks. Time management is quite important and you’ve got to have good guys working there, good leaders.’

Unemployment rates in the ACT are currently among the lowest in the country, making it increasingly diffi cult for franchisees to fi nd good staff.

‘Our biggest challenges were staffi ng and getting used to

running the business.’

The Longmires are very stringent in their staff selection. ‘Haircuts are our widget, but people management is our business. We treat our guys with respect and get them to treat our customers how they would like to be treated, so it takes a while to get that through the business.’

While now in a more comfortable fi nancial position, there was a degree of trial and error involved. Mr Longmire says it was a long journey, requiring commitment to the system, and belief in the business to ensure everything was properly set up from the start.

John Longmire’s tips for potential franchisees

Do your research. If you focus on your business goals, it can be a successful venture.

Picture where you want to be. If you are happy behind a counter making coffees all day, that’s fi ne but if you can’t see yourself doing that, don’t buy a coffee shop because you won’t be passionate about it.

Ask the franchisor lots of questions. Get a list of existing franchisees, go see them and see how they are performing, talk to the staff.

Make sure you get on with your franchisor. If you don’t think much of the franchisor when you meet them, it probably doesn’t bode well for the future.

Verify all the information you are given, get a professional with franchising experience involved.

Accept personal responsibility for your investment. Every business involves some risk which franchisees need to understand.

Get a copy of the Franchisee start-up checklist (see page 15).

PAGE 6 ACCC UPDATE NO. 20

Unfortunately, some players in the market seek to gain an unfair advantage over smaller operators by using their larger size to pressure other businesses.

The use of harsh or oppressive behaviour can amount to what is known as unconscionable conduct. There are no hard and fast defi nitions used to defi ne unconscionable conduct, although court rulings on the issue have provided some direction.

One area where unconscionable conduct can become somewhat of an issue for franchisees is in leasing retail space.

The issue of leasing by a franchise system is generally complicated by the fact that there are three parties involved—the landlord, the franchisor and the franchisee.

Successful franchisors alwaysbargain hard for the interests oftheir franchisees to achieve thebest possible rental outcome.

This is not always easy as the franchisor is generally dealing with a landlord who has an advantage in bargaining power.

Franchisor representatives have complained about diffi culties in securing reasonable terms when negotiating lease renewals with major landlords.

Franchisees for their part often feel disempowered and poorly informed about processes leading to revised rental terms. Sometimes the franchisees claim they are being squeezed out by new rental rates.

There are also situations where the franchisor tries to unfairly use the lease as leverage against a franchisee during a dispute, which concerns the ACCC.

Landlords must act fairly towards their tenants, or risk running foul of the Act. There are a number of ways that some landlords, including franchisors sub-letting to franchisees, have in the past attempted to use leases to pressure their tenants.

The following case highlights how larger parties can be tempted to use their control over leases or other business arrangements to deal unconscionably with a smaller franchisee.

The cases taken to date by the ACCC show there are a number of ways that franchisors can fi nd themselves potentially in breach of the law by using their power over sites they lease. This also applies to landlords who may act unconscionably in their dealings with franchisors and their franchisees.

Like all franchising disputes, the best and most effective way to settle complaints is through good communication and identifying problems early.

The vast majority of franchisors genuinely recognise that their own success rests on helping their franchisees to succeed, but there are always a few black sheep who seek to tip the balance of power their own way by putting undue pressure on franchisees. Using their position in respect of tenancy arrangements can be one of the ways to do this. Equally, landlords need to act fairly in their dealings with franchise tenants.

The ACCC’s attitude is that both sides have rights during disputes, and when one party attempts to use its weight to resolve issues, that may be considered unconscionable conduct.

Apart from bargaining strength, issues that may cause concern include:

> whether the stronger party imposed conditions that were not necessary to protect their legitimate business interest

> the use of undue infl uence or pressure tactics

> whether the stronger party made adequate disclosure to the weaker party

> the willingness of the stronger party to negotiate

> the extent to which each party acted in good faith

> the requirements of any relevant industry code.

Rents under pressureWhen it comes to negotiating a commercial lease on a property, franchise operators are, like all small- and medium-sized businesses, protected from bullying and other unfair practices under the Trade Practices Act.

LANDLORD SQUEEZES TENANT

In 2001 the ACCC took court action against a South Australian master franchisee who sought to punish a franchisee they were in dispute with by attempting to change the condition of a lease.

The franchisee had been renting the site to run a cake shop, while at the same time sub-letting another section of the site to another business.

The landlord, who had originally agreed to the sub-let arrangement, refused to allow the franchisee to continue sub-letting the site, allegedly as punishment for a dispute between the two parties.

The Federal Court found that the franchisee had relied on rent from the sub-let to maintain a viable business. The master franchisee, knowing this, had allegedly sought to punish the franchisee by removing the ability for the franchisee to carry on the sub-let and therefore maintain their business.

The ACCC took the case to court and the landlord was ordered to pay compensation of $10 000 to the franchisee.

Although franchising has experienced peaks and troughs since its widespread inception in Australia, it has grown to become a signifi cant element of the local economy.

The franchising sector is now estimated to be worth around $80 billion a year, and employs approximately 600 000 Australians.

According to a Griffi th University study, the number of franchisors in Australia in 2004 has grown to 850, up from 693 in 1998 when the Franchising Code of Conduct came into force. That number is expected to exceed 900 when the new data is released.

Of those businesses surveyed in 2004, 92 per cent were Australia-based systems.

The study pointed to a number of interesting trends developing in the franchising area that suggest it is maturing and moving away from some of the negativity which surrounded some early franchising operations.

The number of people employed through franchising is increasing steadily, with a larger proportion of those positions becoming full-time. More than a third of franchisors were assisting franchisees with fi nance, and more outlets are now owned and run by franchisees rather than the owner of the system.

The ACCC’s own data shows that it now receives, on average, fewer complaints than it did before the franchising code was introduced. Viewed overall, the level of complaints and problems appear to be encouraging: fewer than 2 per cent of franchisees were involved in a substantial dispute in the 12 months before the 2004 survey, and fewer than 3 per cent of franchisees ceased to operate during the same period.

Despite the attention franchising has received since 1998, the average franchisor has been in business for 14 years and has been franchising their operations for 11 years.

With one-third of the Australia-based systems operating internationally, the study found that continuing growth may lead to a further expansion of Australian franchises into overseas markets. However, inexperience in international markets and a lack of suitable business partners may lead to the overseas component of many of those franchise businesses remaining small.

State of the sector:MATURING AND GROWINGWhen the latest research into the state of the franchising sector is released later this year, it will likely show—once again—strong growth in the number of franchisees and franchise systems.

PAGE 8 ACCC UPDATE NO. 20

There is no doubting its popularity. According to the Franchise Council of Australia, franchising has been growing faster than any other business sector over the past four years and now employs around 600 000 workers.

Complaints about franchising have declined since a mandatory code of conduct, administered by the ACCC, was introduced in 1998.

But signifi cant risks still remain for investors who fail to properly consider what is needed to run a successful franchise.

A group of ill-prepared, cashed-up workers all too willing to invest their life savings has emerged, and many of them fi nd out too late that not everyone is cut out to run a successful franchise.

Owning a franchise can be a highly rewarding way to make a living for many Australians, but it can also lead to fi nancial ruin if not done properly.

The risks include scams and bogus business schemes, as well as structural issues, which, if not addressed, can bring an entire system down.

The ACCC has taken several cases to the Federal Court, and actively scans newspaper advertisements to detect and shut down unscrupulous operators before they can start claiming victims.

In April this year the court found directors of the Photo Safe and Data Vault franchises had misled 37 small business investors. Each had paid up to $160 000 for photographicand imaging service businesses that gave little or no returnon their investment.

FRANCHISING START-UPSFranchising is opening the door to thousands of would-be business owners, attracted by the prospect of buying into proven systems.

ACCC UPDATE NO. 20 PAGE 9

The ACCC also obtained court orders earlier this year against a fertiliser spray franchisor after it was agreed the company had made lofty promises to potential franchisees with little evidence to back those claims.

Those investors could have spared themselves a lot of pain had they sought professional advice before handing over their savings.

Reaching inexperienced, aspiring franchisees is a challenging task for organisations like the ACCC, which is now resorting to placing advertisements in the businesses-for-sale columns of newspapers to warn investors against rushing into franchise businesses.

Legitimate, sound franchise businesses can take around fi ve years to become established and begin returning a comfortable profi t, even in well-established models with good brand recognition.

Potential franchisees should consider that they will be limited in their ability to make changes to their stores or products. As part of buying into a franchise, they agree to comply with the franchisor’s business model and they will not have the same freedom as the owner of an independent small business.

Of course these limitations must be weighed against the advantages that come with being part of a proven system—namely staff training, established supply chains and the support of the parent company.

These are important considerations for fi rst-time business owners, and it is worth their while to ensure that the franchise they are considering has appropriate support mechanisms in place.

The best franchisors realise that profi ts come from supporting their franchisees. By doing so, they know they will enjoy fl ow-on returns as the individual outlets succeed.

But some franchisors give in to the temptation of growing their chain of stores too quickly, sometimes signing up as many new entrants as they can without giving much thought to the future. Eventually they are unable to support all their franchisees.

This type of poor planning leads to owners being burned as the franchise’s entire business system collapses beneath them.

A key resource for prospective franchisees is a disclosure document, which must be given to them no fewer than 14 days before any non-refundable money is handed over or before the agreement starts.

This disclosure document contains critical information on the fi nancial health of the franchisor, some information on marketing and advertising funds and details of how many other franchisees have terminated or not renewed their agreements in the past three years.

Potential investors also need to think long term, especially about the type of products they will be selling. Market trends change and there are no guarantees that what is selling well today will be as popular in fi ve years’ time, when tastes may have changed.

When banks look at funding a franchise, they are likely to view it as no less risky than any other small business. Potential franchisees should take exactly the same line.

A good starting point for researching a fi rst-time franchise investment is the ACCC’s Franchisee start-up checklist, (see p. 15) available on the ACCC website or by calling the small business helpline (see p. 19 for contact details).

Potential franchisees should consider taking three important steps:

Speak to franchisees who have been in the business for at least one year. This will yield valuable information about what to expect and will test claims made by the franchisors.

Engage a legal or business advisor to cast an expert eye over a business to advise on its viability and the likely fi nancial implications. This advice is especially useful for those with little previous small business experience and could save would-be buyers much more than it costs.

Read all relevant material thoroughly and compare different systems. Organisations like the ACCC and the Franchise Council of Australia provide a broad range of information to help potential franchisees.

Potential franchisees shouldalso consider:

Whether the franchise agreement limits how close their co-franchisees can set up in opposition to them.

The level of support and back-up provided by the franchisor.

Potential cyclical downturns in a market that could threaten the viability of their business.

The best franchisors realise that profi ts come from supporting

their franchisees. By doing so, they know they will enjoy

fl ow-on returns as the individual outlets succeed.

PAGE 10 ACCC UPDATE NO. 20

One of the greatest challenges currently facing franchises is the national skills shortage across a diverse range of industries.

As Jim Penman, founder of the Jim’s Group of franchises told a roundtable earlier this year, ‘… we’re competing with somebody who’s been offered $100 000 to go and hold a sign on the road.’

Mr Penman cites the booming Western Australian economy as one of the hardest places to fi nd good franchisees due to the demand for workers. But staffi ng businesses can be equally diffi cult on the east coast of the country.

With a national unemployment rate of 4.9 per cent, fi nding and retaining quality staff has become a major hurdle. In the ACT, where unemployment has reached a low of 3.2 per cent according to Australian Bureau of Statistics labour force data, the challenge is even more diffi cult.

Just Cuts salons in the ACT (see p. 4) are among many businesses to have felt the pinch of the country’s strong economy and the resulting lack of available workers.

At its peak, John and Monica Longmire were operating fi ve Just Cuts salons in the ACT, but have gradually reduced the number to two as a result of several pressures, one of the most pressing being the diffi culty to fi nd good, qualifi ed staff.

The Longmires sold two of the franchises to former staff members wanting to further their careers with the business.

‘We have had opportunities to expand, but the lack of qualifi ed hairdressers has hindered that’, according to Mr Longmire.

As one possible solution the business is now looking at overseas recruitment and training, to try to fi ll some of the shortfall.

Many companies are also looking at mentoring and career planning, including encouraging employees to take on skills to run their own outlets, as has happened in the ACT.

Incentives to keep staff in the business longer include secondments to other stores, both interstate and overseas, as well as centralised training for staff to develop retail, business and management skills designed to help them in the transition from employee to potential employer.

SKILLSSHORTAGES

There are many variables that can threaten to stall even the best franchise business model.

Choosing the right site to set up a business is crucial to its success, and can be one of the most important decisions an owner can make in the planning stages.

While independent small businesses have autonomy over where they establish their shopfront, for franchisees who are part of a larger system, the issues can be more complex.

Setting up two identical stores too close to each other can affect the profi tability of both businesses drawing from the same pool of customers.

In recognition of this issue, some franchise agreements contain what is known as a territory or proximity clause, stating how close the nearest outlet in the system may be located to another existing franchise operation.

Such decisions need to be made at the planning stage when a franchisor is considering expanding. However, this important step can sometimes be overlooked and as a result some franchise agreements contain no such provisions.

Decisions to locate a new outlet close to an existing franchise can create tension with existing owners, who may have been led to believe they had rights to a particular geographic area.

Franchisors also need to ensure their

products will be robust enough to

survive in the face of future competition.

Of course, competition can come from any number of sources not just other stores in the same chain. There is nothing in the Trade Practices Act that prevents a competitor with a similar product setting up close to an existing business, and attempts to block a new entrant or divide up territories between competitors may lead to a breach of the Act.

Franchisors need to ensure territory issues are fully considered before starting to expand and take on additional franchisees. They should also communicate clearly with prospective investors on how their future operations might be affectedby additional expansion of the system. Franchisors also need to ensure their products will be robust enough to survive in the face of future competition, and that their individual franchisees are well supported and kept up-to-date on product innovation and changes to the system.

Prospective franchisees need to consider what will happen to their operation if competition increases, and ensure they have a clear understanding with their franchisor that is spelt out in their franchise agreement of what the system’s approach to territories or expansion will be.

Setting the

BOUNDARIES

PAGE 12 ACCC UPDATE NO. 20

FRANCHISOR FEATURE

For a young entrepreneur starting out on a promising career in franchising, there can be few pills harder to swallow than having your savings disappear and an entire business crumble under your feet.

That was the fate that befell Jason Gehrke when he became a start-up shareholder and director of a real estate franchise operation.

Mr Gehrke, in his early 20s at the time, says luckily he was young enough to start again, but knows fi rst-hand how punishing a franchise failure can be.

IN FOR THELONG HAUL

Franchising has created thousands

of success stories but the path

to wealth is not always paved

with gold, as franchise advisor

Jason Gehrke explains.

FRANCHISOR FEATURE

‘It’s a real kick in the guts. The personal cost is pretty substantial and when your confi dence is shaken like that it’s very hard to recover.’

Building on that experience from the early 90s he undertook to help others avoid a similar fate. After taking on several franchisee and franchisor roles, which led to him being named a Franchisor of the Year in 2004, he established the Franchise Advisory Centre, to offer advice to those starting out in the sector.

ACCC UPDATE NO. 20 PAGE 13

Mr Gehrke, who regularly presents seminars for prospective franchisors and franchisees, sees a trend in many of the mistakes that land both groups in hot water.

‘[Compliance with] the regulation is not onerous, but it is essential in that it is part of ensuring that the business is running smoothly. Franchising is not always chosen as a proactive strategy, it’s often chosen as a reactive strategy as a result of unsolicited requests from people who say, “This is so good I want to get involved”.’

However, many businesses soliciting expressions of interest may have a number of possible expansion options that they have not considered.

‘Franchising is a strategy that should be on the map for many small businesses that have a unique concept, but it’s got to be highly profi table, and the owners must be totally committed to it—it should be part of their long-term plan.’

Proving the concept is an essential prerequisite to on-selling the franchise.

‘It has to be profi table not just for the existing person, but in additional outlets and territories it must generate 20 to 30 per cent in addition to a good working wage for the owner, otherwise you might as well not bother.’

Gehrke says that in the fi rst three years of franchising a business it is not uncommon for franchisees to make more money than their franchisor. A franchisor has to reinvest in the business, and although it can be frustrating to see franchisees doing well, it demonstrates the system is working.

Failing to enforce compliance with the system can also be a common mistake that leads to diffi culties.

‘Everyone has an agreement, but it is possible that franchisors may make exceptions or tolerate some behaviour they shouldn’t in terms of the franchise agreement. You can have the best franchise system in the world but it can still go to rack and ruin if you are not prepared to enforce it.’

Choosing a business consultant is an important step, but must also be approached with caution. A consultant doesn’t always bear the long-term responsibility of fi nding the best candidates or making sure they succeed as franchisees.

The more franchisees who are taken on, the more responsibility falls to the franchisor to ensure product innovation, marketing and training are all kept up-to-date and that market pressures do not threaten the business.

Of course committing to franchising goes beyond market analysis. For many, the decision will be based on emotion and the desire to be their own boss. Once all other factors are considered and the business is well-grounded, success can come down to a question of commitment.

‘Franchising can make you wealthy, but there are no guarantees it will. It will test you emotionally, it will certainly test you fi nancially, and it may test you physically. If you go into it prepared for that, it can be an enormously satisfying way to work.’

Jason Gehrke’s tips for prospective franchisors

Ensure the concept is sustainable. Some businesses, like fashions, may only have short life expectancies. If business can’t change rapidly to accommodate changing consumer tastes, they may not have a bright long-term future.

Ensure minor regulatory changes won’t shut down the business overnight, as happened to a CD library business when copyright laws changed.

The franchisor must be totally committed to the business. You will embark on a long, testing journey that will involve some pain.

Don’t outsource your responsibility to a consultant or lawyer. While independent advice is essential, ultimate responsibility for success rests with the owner.

Choose franchisees carefully, and not until the system is well tested and proven. Your success will depend on their success.

PAGE 14 ACCC UPDATE NO. 20

MEDIATIONSmall business owners in today’s competitive marketplace face plenty of pressures, and franchisees are no different.

In fact, franchising can create a unique set of challenges, some of which may lead to friction.

For whatever reason, franchisees may fi nd themselves in dispute with their franchisors, and the ensuing confl ict can lead to serious issues that prevent both sides from getting on with business.

Taking the matter to court is often a costly option that many small business owners are reluctant to take. This is when mediation has a role to play.

The fi rst, and usually the best, option is to try to resolve a dispute directly by sitting down and discussing the issues with the other party.

Mediation does not work for everyone, but it does have a good success rate …

However, after three weeks of unsuccessful attempts at resolving the dispute, the Franchising Code of Conduct can require both parties to attend mediation to work through their diffi culties.

The code is part of the Trade Practices Act. If one side in a dispute requests mediation, the other side must attend. If they do not, they risk being found to have breached the code and therefore the Act.

Mediation involves both sides discussing their concerns with a professional third party trained in resolving a range of business disputes.

The two sides can agree to their own mediator, or they can ask the Offi ce of the Mediation Advisor to appoint one.

The OMA was set up by the Australian Government and has a network of advisors around the country.

Once contacted, the advisor will begin assessment of the dispute by talking—usually separately in the fi rst instance—to each party. The mediator will then advise on how best to resolve the problem.

Mediation does not work for everyone, but it does have a good success rate—in fact, 74 per cent of cases handled by the OMA are resolved successfully.

Moreover, taking part in mediation does not remove a party’s right to legal action, although this should always be seen as a last resort rather than an alternative to resolving complaints.

Mediation does involve some costs, but generally these are lower than the legal fees that come with court action. The cost of the mediation service is split evenly between both sides in a dispute.

When a case involves a potentially serious breach of the Act, such as a franchisor acting unconscionably towards one or more of their franchisees, the ACCC can also step in and take legal action of its own.

DISCLOSURE DOCUMENTS

Franchisors are required by law to give prospective franchisees a disclosure document before they sign up or make fi nal payment of any fees related to buying into a franchise.

But what is a ‘disclosure document’?

A disclosure document is a set of papers containing important information about about the fi nancial health of the franchisor’s business

A disclosure document should also provide any information about the system owner that could possibly affect individual franchisees.

WHAT RULES APPLY?

A disclosure document must be updated within three months of the end of each fi nancial year.

It must be provided to a prospective investor 14 days before an agreement begins, or before the investor is required to pay non-refundable fees.

Once part of the business, franchisees are entitled to ask the system owner for a yearly up-to-date disclosure document.

Franchisors who do not provide accurate, updated disclosure documents can be found in breach of the Trade Practices Act.

SO …

As a prospective franchisee, you should regard a disclosure document as one of your most important research tools when deciding whether to join a franchise.

If you’re looking to buy into a franchise, the ACCC strongly recommends going through the disclosure document with the assistance of an independent business advisor, who can cast a critical eye over the state of the business.

JARGONBUSTERJARGONBUSTER

But do you know about the cooling-off period that forms part of your agreement?

What about the intellectual property issues related to the product?

Do you know anything about the franchisor’s track record in business?

As a prospective franchisee, you need numerous but important pieces of information to help you form a complete picture of the business you are contemplating buying. And without accessing all available information about a franchise, your major investment could turn sour.

To help new or expanding franchisees ensure they have asked all the right questions before signing on the dotted line, the ACCC has developed a franchisee start-up checklist.

This checklist covers important aspects of the franchise agreement, such as proximity to other outlets, issues with leases—even what to do if another business copies your system’s successful model and sets up nearby, threatening the viability of your own operation.

The checklist also gives you an idea of what sort of information may help you to make a decision, such as obtaining a list of other franchisees tied to the system and checking the status of any disputes the franchisor is having with any of their outlets.

Assessing the fi nancial health of a business goes well beyond simply analysing profi t-and-loss statements. Many issues are best assessed by a business advisor, someone who has specialist training and experience in building a complete picture of a business and can advise prospective investors accordingly.

On its own, the franchisee start-up checklist will not give you all the information you need about buying into a franchise. However, it will help ensure that you have covered all the bases, along with giving you some direction about issues you may not even have considered.

The checklist is available free as a download from the ACCC website or you can order a hard copy by calling the small business helpline (see p. 19 for contact details).

Okay, you’ve looked around, compared a few different franchises and now you’re ready to buy the business you want …

FRANCHISEE

start-up checklist

PAGE 16 ACCC UPDATE NO. 20

Small businesses go by any number of labels, but some sellers of businesses will go to extraordinary lengths to call their operation anything other than a franchise.

Several cases have been reported to the ACCC where businesses attempted to avoid complying with the mandatory Franchising Code of Conduct by trying to mask their businesses as something else.

Regardless of whether it is being sold as an investment or licensing arrangement, if a business meets the broad defi nition of a franchise, then that is how it will be treated by the law. That law, contained in the Trade Practices Act, imposes a number of requirements on the seller, such as the need to provide a disclosure document and a seven-day cooling-off period.

If a franchise is being passed off as something it is not, it may prove to be little more than a scam.

Typical tactics used by scammers include pushing for a quick sale, pressuring victims into thinking they will miss a golden investment opportunity unless they respond quickly, and promoting the investment as an inside tip or one-off opportunity.

Tactics or claims that a business does not need to comply with the Franchising Code of Conduct should set alarm bells ringing for prospective investors.

A genuine franchisor will never put pressure on an investor to sign up quickly, as it is in their own interest to ensure the most suitable person buys into the system.

They will also provide documentation about the business at least a fortnight before a franchise agreement is signed and advise the investor to seek independent legal or fi nancial advice and come back with signed evidence that they have done so, or have waived their right to do so.

Scammers looking to exploit prospective franchisees also target more vulnerable sectors of the community such as migrant communities or people tempted to invest heavily with their life savings to chase a better standard of living.

Scammers also target retirees who are often unsure of how best to invest their savings and may be lured into parting with their money.

Remember, you wouldn’t buy a car without fi rst doing some research, taking it for a test drive and comparing it to other cars. So why would you decide to part with a potentially much larger sum of money to invest in a franchise without at least the same level of caution?

There are no short cuts to success, and all businesses depend on hard work, compliance with the law and

dedication to long-term goals.

While the ACCC can and does act against fraudsters, it is often diffi cult or impossible to retrieve money once it is gone.

Keeping the chequebook in your pocket until you have covered all bases is a much safer and far less painful option than trying to chase your life savings once they have disappeared.

FRANCHISE

ACCC UPDATE NO. 20 PAGE 17

FOR SMALL BUSINESS

Bait advertising, news for business

Comparative advertising, news for business

FairStore: a best practice guide for stores serving remote and Indigenous communities

Franchisee start-up checklist

Price advertising and the travel industry, news for business

Streamlined collective bargaining for small business: more timely decisions/greater certainty of outcomes

TPA matters for small business CD ROM

Trade practices start-up checklist for small business

Warranty and refund signs, news for business

FOR CONSUMERS

Hot water bottles, safety alert

Household furniture hazards for kids, safety alert

LATEST SMALL BUSINESS AND CONSUMERPUBLICATIONS

MISLEADING CLAIMS

During September this year the ACCC accepted court enforceable undertakings from the owners of a home-based résumé business for allegedly misleading potential business investors.

The Perth-based business, run by Burnan Pty Ltd, was accused of making misleading claims about the profi tability of its résumé writing services, sold as business opportunities for $22 000 each.

Investors were allegedly told that by signing up for the business they could expect to earn up to $96 000 a year.

Burnan acknowledged the ACCC’s concerns that some of its actions could place the company at risk of breaching the Trade Practices Act.

Burnan undertook to stop making representations that prospective buyers could expect to make a specifi c daily amount of money once training was completed.

It also agreed to implement a trade practices compliance program and review all advertising and selling practices, and to ensure claims about current or future earnings potential were not misleading or deceptive.

SKIRTING THE LAW

In February this year the Federal Court found that a Melbourne-based employment and recruitment business was in fact a franchise, and had breached the Trade Practices Act by not complying with the mandatory Franchising Code of Conduct.

Contact Plus had promoted, marketed and sold licences nationally to investors, some paying a $60 000 lump sum licensing fee.

Justice Weinberg found that although the businesses had been sold as licensing arrangements, they were in fact franchises, and Contact Plus had failed to comply with the law by not providing investors with proper disclosure documents, terminating franchise agreements without following the procedures provided under the code and providing other protection afforded by the code.

The court also found Contact Plus had misrepresented the liability for a lump sum licence payment to franchisees and that the lump licence fees disputed in the proceedings were not enforceable.

PAGE 18 ACCC UPDATE NO. 20

The ACCC has received several complaints from domain name owners who have paid licenses fordomain names similar but not identical to the ones they are already using.

A number of unsolicited mass mail-outs have been catching out unwary owners all over the world. These letters often exploit their lack of understanding of the intricacies of the domain name system, or simply rely on busy owners paying the invoice without thoroughly checking it.

‘Similar’ is not ‘the same’

Many of these owners fi nd themselves paying for domains they don’t want or need. For instance, someone whose registered website goes under the domain name of www.your-business.com.au might receive a letter asking them to pay for www.your-business.net.au or www.your-business.com.

While seemingly similar, these are completely unrelated domain names and customers unwittingly end up paying and signing up for a second name.

The ACCC has already taken action where this type of activity has involved deliberately misleading invoices. However, despite the publicity surrounding the cases, businesses are still being caught out.

Some simple steps

The good news is there are some simple steps that domain name owners can take to avoid being caught out or ripped off.

When signing up for a domain name, owners should receive a tax invoice and a registry key or password. Keep these in a safe place. They are important for future use of that name when setting up a website.

The invoice should also be used to cross-check any offers that come in. Make sure the name of the company is the same as the one you originally signed up with. Also check the renewal date for your original domain name.

Most importantly, check that the actual domain name is not a slight variation of the one you took out originally and is the one you use for your website.

Useful resources

The ACCC has a fact sheet on domain name registrations, Domain name renewals/registrations—don’t get caught, on its website (www.accc.gov.au and follow the link from ‘business rights and obligations’).

The Australian Domain Name Administrator website (www.auda.org.au) carries consumer warnings about domain name scams. This website also contains a registry of, and look-up service for, .au domain names.

The Department of Communications, Information Technology and the Arts has also published a free booklet Staking your claim on the web—available online at www.dcita.gov.au.

WWWhat’s in a NAME?Quite a lot actually, if you have an internet domain name and are not paying close attention to who is sending you the bill to keep using it.

ACCC UPDATE NO. 20 PAGE 19

ACT (national offi ce)

PO Box 1199DICKSON ACT 2602

Tel: (02) 6243 1111Fax: (02) 6243 1199

New South Wales

GPO Box 3648 SYDNEY NSW 2001

Tel: (02) 9230 9133Fax: (02) 9223 1092

Victoria

GPO Box 520MELBOURNE VIC 3001

Tel: (03) 9290 1800Fax: (03) 9663 3699

South Australia

GPO Box 922ADELAIDE SA 5001

Tel: (08) 8213 3444Fax: (08) 8410 4155

Queensland

PO Box 10048Adelaide Street Post Offi ce BRISBANE QLD 4000

Tel: (07) 3835 4666Fax: (07) 3832 0372

North Queensland

PO Box 2016TOWNSVILLE QLD 4810

Tel: (07) 4729 2666Fax: (07) 4721 1538

Western Australia

PO Box 6381EAST PERTH WA 6892

Tel: (08) 9325 0600Fax: (08) 9325 5976

Tasmania

GPO Box 1210HOBART TAS 7001

Tel: (03) 6215 9333Fax: (03) 6234 7796

Northern Territory

GPO Box 3056 DARWIN NT 0801

Tel: (08) 8946 9666Fax: (08) 8946 9600

ACCC contactsACCC Infocentre 1300 302 502

Small business helpline 1300 302 021

ACCC website www.accc.gov.au

for all business information go to www.business.gov.au

PAGE 20 ACCC UPDATE NO. 20

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