Watchdog warns investors over income promises
THE consumer regulator is urging would-be franchise buyers to watch for inflated franchise income claims.
The warning follows a string of complaints to the Australian Competition and Consumer Commission from franchise owners who say they were promised a minimum ''guaranteed'' income from their franchise but had earned little or nothing.
Many of the complaints concern franchisors in the cleaning and home services industry.
''The ACCC is investigating whether a number of franchisors in this industry engaged in misleading or deceptive conduct by making claims about potential earnings,'' the acting ACCC chairman, Michael Schaper, said.
Dr Schaper said the watchdog was particularly worried about franchisors targeting people from non-English speaking backgrounds, who may not fully grasp the agreements they sign.
While most franchisors are honest, a growing number seemed to be making untenable promises, he said.
Anyone thinking of buying a franchise should discuss their franchise agreement with an independent lawyer and an accountant.
''If you don't understand it, don't sign it,'' Dr Schaper said.
He also suggested consulting other franchisees to ask whether they were earning what they initially expected.
The franchise lawyer Elizabeth Gore-Jones echoed Dr Schaper's warnings. ''It is imperative that a potential franchisee speak to current franchisees within the system,'' she said.
''These franchisees can tell you if they are making enough money to survive.''
Information about former franchisees should also be in the disclosure document, unless they have requested it be withheld, she said.
If a franchisee has left the system, there will be a reason - find out what it is.
Ms Gore-Jones said it also paid to investigate what the earnings information a franchisor supplied was based on, in light of three questions.
''Do those figures reflect the demographics of the area the potential franchisee will be operating in? How many weeks, months or years was a franchisee operating before they earned that amount? How old are the figures?'' Ms Gore-Jones said.
Ensure you get the figures in writing, she said. Then check any disclaimers the franchisor includes.
Often, franchisors state that figures are ''indicative only'', instead of a clear statement of the money that the franchise buyer will earn.
If the franchisor has no basis for the earning claims, this may still amount to misleading and deceptive conduct, Ms Gore-Jones said.
Heather Smith, a management accountant, said the ACCC's warning highlighted many of her own concerns. Ms Smith, who coaches new franchisees on accounting, said anyone with money was ''a possible target'' for deception.
The economic environment meant many laid-off workers with redundancy payments may be considering buying a franchise.
Ms Smith said buyers should first talk to other members of the group they are interested in who have owned a franchise for at least a year, consult them about the realities of operations, get an accountant to examine the financials and check whether the fiscal forecast contained all expenses.
A franchise, Ms Smith said, ''can be an enriching opportunity or a stressful way to lose a lot of money''. According to the ACCC, franchisors who distort the potential income of a franchise can be subject to litigation and court-imposed penalties of up to $1.1 million per breach.
''Franchisors must have a reasonable basis for making all income representations to potential franchisees,'' Dr Schaper said.
Among other tips, the ACCC advises potential franchisees to beware of ''get-rich-quick schemes'', and know their cooling-off rights.
Anyone who buys a franchise has the right to terminate an agreement within seven days of entering into it or making any payment under it, whichever occurs earlier.