Franchise industry backlash over new disclosure law grows

Franchisors are becoming increasingly frustrated by the additional red tape created by the new disclosure laws that came into effect on last Monday.

“It has been discussed and it is an emerging issue,” says Steve Wright, the chief executive of the industry’s peak body, the Franchise Council of Australia.

One of the problems emerging is that the new disclosure requirements expose retail franchisors to having to proceed with a lease and open a company-owned store if the franchisee gets cold feet at the last minute.

Mark Langford, chief executive of franchised game retailer Gametraders, says many franchisors enter the store lease on behalf of the franchisee and under the new laws this must be completed before the franchise agreement is provided to the franchisee.

Under the new laws the franchisee cannot sign for 14 days and then there is a seven day cooling off period. This leaves the franchisor exposed for 21 days during which time the franchisee could walk away from the deal, leaving the franchisor with an empty store.

The FCA’s Wright describes this as an “unintended consequence” of the new laws. He says this issue and others are being raised with the Federal Small Business Minister Craig Emerson.

“The common thread is that these things are making the [signing up] process more difficult to execute and are actually having the potential effect of discouraging one of the most important aims of the whole disclosure process – and that is to ensure that the franchisees are in the best possible situation to make a decision [about the franchise] and take the opportunity to get proper advice before signing.”

He says that the additional disclosure is significantly increasing the volume of documentation provided to the franchisee as part of the disclosure process, which is discouraging franchisees from getting independent advice.

“It can actually have the effect of franchisees not getting advice because it costs more. This is certainly not intended by the new laws.”

He says the FCA has an understanding that Emerson’s office will be monitoring implementation of the new laws, so he expects a sympathetic hearing from the Minister.

“I think there is certainly the need to look at some of these unintended outcomes to fine tune it to make sure it does what it aims to do most effectively.”