Can you ditch a franchise agreement? Retail Food Group claims lead to legal warnings on franchising

SmartCompany, December 11, 2017

Prospective franchisees are being warned about the difficulty of exiting franchise agreements, after a Fairfax investigation into franchise operator Retail Food Group suggests hundreds of the group’s franchisees have hit financial hardship after buying stores.

The Fairfax report alleges franchisees of the company’s brands, including Donut King, Gloria Jean’s, Brumby’s and Michel’s Patisserie, have been left stranded and unable to sell unprofitable franchises after investing hundreds of thousands in the operations.

Since the initial report on Saturday, which included the experiences of a number of current and former franchisees, Fairfax claims around 100 franchisees have come forward with tales of challenging experiences with the company.

Retail Food Group has responded with a strong rebuttal of the claims, saying what the report “failed to acknowledge properly are the steps we have been taking over the past year” to improve support to franchisees and help them further develop their profitability.

Fairfax alleges the costs associated with running a franchise business through Retail Food Group gives rise to underpayments of staff as franchisees struggle to make ends meet. On this front, the company has said it takes the issue of underpayments “very seriously”.

“For a long time now we’ve been taking proactive steps to better inform, support and educate our Franchise Partners in relation to their employer obligations, whilst also providing their team members with avenues to raise any concerns they may have with us,” the company said in a statement.

However, legal experts have previously told SmartCompany that franchise models are naturally complicated structures, and while the consumer watchdog monitors compliance of franchisors through the Franchising Code, it’s up to individuals to investigate businesses thoroughly before diving in.

Marianne Marchesi, a franchise law specialist and principal at Legalite, says franchises are agreements “for the long term”, with early exits being extremely challenging for franchisees.

“In terms of getting out, the franchise agreement can be very limited to get out without selling the business or totally abandoning it,” she says.

The claims around Retail Food Group businesses include that franchisees attempted to sell their businesses, but could not find a buyer. Marchesi says those looking into the franchising model need to know there is no clear “out” clause if an agreement isn’t going to plan.

“There can be [scope to exit] but not as a sort of clear right. You usually have a matter of a negotiation between the parties, where the franchisor might [buy] back the business.”\

Read more: Over 40% of new business owners and franchisees do not know what due diligence is

Know your rights on dispute resolution

Running a franchise business isn’t just about the number of sales you ultimately make: from marketing funds to the point of sales equipment you have to use, there are plenty of elements that a franchisee might have concerns about, says Marchesi.

When concerns do arise about an element of a franchise’s operation, the first port of call is to go to the parent company, she says.

“Initially you would negotiate with the franchisor or get a lawyer involved,” she says.

If there is no progress on that front, there is a second potential step, but Marchesi says many franchisees don’t know about it.

“There are dispute resolution [provisions] within the Franchising Code for a mediation process.”

The Office of the Franchising Mediation Adviser can arrange a mediation led by an independent party, which Marchesi says can be “invaluable” for resolving concerns.

The challenge, however, is that many franchisees have not received specialist advice before entering an agreement, which means they are unaware of their rights to dispute resolution.

“Where franchisees haven’t had that advice, they just may not have that insight,” she says.

Marchesi says franchising can be a very efficient model for many entrepreneurs, but those considering diving in should think about the long-term nature of the investment, including what happens if the business gets sold before the end of the franchise agreement date.

Not only are most franchisees expected to enter an agreement for five or 10 years, there are usually strict “restraint of trade” clauses that stop franchisees from starting a business in a similar space if they sell or abandon the franchise.

“These are very commonly quite wide, and you might be looking at a restraint of three years [from when you exit],” Marchesi says.

With so many moving parts in any franchise business, Marchesi says the only thing a prospective investor can do to ensure the investment is right for them is do research — including speaking to current and former franchisees and getting expert advice on any paperwork before signing.

“If you’re going in with your eyes open, that mitigates things,” she says.