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How to Avoid Misleading and Deceptive Statements During the Sale of a Franchised Business

One of the most highly litigated areas when it comes to Franchising is regarding alleged Misleading and Deceptive conduct and unreasonable representations about future matters by Franchisors during the sale of a Franchise.

 The Disclosure Document and Franchise Agreement entered into do not form the entire agreement, Franchisees can allege reliance on statements made by the Franchisor's staff, and that these statements contributed to their decision of entering the agreement.  Even brokers or accredited training stores statements can be seen as a Franchisor's inducement if there is a proven agency relationship to the Franchisor.

Consequences of a successful claim include orders for payment of damages, adverse publicity orders, trade practice compliance training and orders to pay ACCC and Court costs.  Importantly, misleading the Franchisee in any way will foster a negative relationship, likely to cause stress and financial losses for both parties.

Franchisors and Franchisees do not want to start a relationship on grounds of distrust, however most Franchisors don't anticipate that any excited new Franchisee will one day take them to Court.  All staff involved in the sale process must be trained not to mislead the Franchisee, even seemingly harmless comments in passing may one day be used as evidence. 

The following statements were made by Franchisors who were successfully pursued by the ACCC:

Little Joe and Joey's Pty Ltd: Franchisees were guaranteed payment of $2,000.00 per week for 5 years and that national marketing campaign would be sufficient to make the brand a substantial competitor among existing major brands.

Quiznos Pty Ltd: The franchise system was said to be 'proven' when in fact there had been no track record in Australia, that the American menu had been 'Australianised' when it had not and that the stores operated by the Franchisor had been trading well and operating profitabily when they had not.

Office Support Services International Pty Ltd: OSSI stated it had conducted its business since 1992 when it had only commenced trading in 2001, that the average earnings would be $85,140.00 for a 30 hour week when there was not enough work available for franchisees tow ork 30 hours, and that OSSI Franchisees serviced 6000 customers every 12 weeks.

WHAT THIS MEANS FOR YOU:

Business Managers, Recruitment, Marketing, Operations, etc:

  1. Do not state likely future earnings, sales, profitabilty, growth or demand for services.
  2. Do not make statements regarding future long term initiatives and marketing strategies of the Franchisor as these could change.
  3. Make notes of all material conversations or send emails following up conversations.
  4. Correct any misunderstandings or misrepresentations that become known to you, silence can be deemed as misleading and deceptive conduct.
  5. Encourage applicants to conduct their own inquiries and due diligence.
  6. Ensure the prospective Franchisee signs a Deed of Prior Representation before signing the Franchise Agreement.
  7. Advise the prospective Franchisee in writing that statements made by third parties such as brokers and training stores are not endorsed by the Franchisor.

For a full list of past and current ACCC Franchising Investigations click here.

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