As a potential investor, it is important that you exercise due diligence in researching your selected franchise system before signing any agreements.

Franchise scams

The benefits of franchising attract legitimate franchisors and franchise systems, and enable them to operate successfully. However, these benefits may also attract unscrupulous operators seeking to take advantage of potential franchisees through fraudulent business activities - franchise scams.

Scam franchise or business opportunities usually offer investors the chance to join a ‘proven business system’ that requires minimum effort, experience or skill but promises instant rewards. These promises may be made in advertisements, seminars or workshops where the incentive of a special ‘join today’ bonus may be offered to induce people to sign up immediately. The scammers may misrepresent the franchise earning potential, ease of operation, success of existing franchises, ‘head office’ or franchise system support, initial outlay and business structure. These scams usually promise a risk-free investment with immediate high returns.

Other scammers may attempt to deliberately structure their business to avoid the obligations of the Franchising Code of Conduct by calling it a ‘distributorship’ or ‘licence agreement’. However, simply because a business is not called a franchise does not mean that it cannot fall under the definition of a franchise agreement under the Code.

The Australian Competition and Consumer Commission (ACCC) is active in monitoring the franchising sector for any fraudulent activity and taking enforcement action when and where it detects a breach of the law. The existence of the Code and this enforcement action has deterred many illegitimate and dubious scam franchise systems from operating in Australia, and has provided a safer investment environment for franchisees.

Warning signs

Some warning signs of scam franchise opportunities include:

• Claims you can make large amounts of money quickly and with a minimum effort;
• A reluctance by the ‘franchisor’ to provide contact details for other ‘franchisees’;
• ‘Franchisors’/’master franchisees’ that do not provide written information/statements supporting their claims;
• A requirement for payment to be made upfront before any written information is released;
• Inconsistent financial information about the business’ profitability; and
• A franchise advertised with only a PO Box as identification and contact address.

You should seriously consider avoiding a business opportunity if you see any of these warning signs. If you decide to ignore them and elect to accept the offer, it may later amount to a bad business decision for which the ACCC, the courts and the Act can provide no remedy.

However, remember that only a minority of business opportunities available in the marketplace are scams - provided you do sufficient research about a franchise opportunity, you should not be caught by a scam.