The Washup on Geowash
By Stone Group Lawyers on April 03, 2019
The ACCC has successfully prosecuted former hand car wash and detailing franchisor Geowash in the Federal Court for acting unconscionably, making false or misleading representations and breaching the Franchising Code of Conduct by failing to act in good faith in its dealings with franchisees.
A lengthy ACCC investigation and resulting court proceedings determined Geowash had made false or misleading representations on its website about the revenue and gross profit prospective franchisees could expect to receive, and that Geowash had commercial relationships with numerous major corporate entities (which in fact it didn’t).
Geowash was found to have acted unconscionably towards a number of its prospective franchisees about the methods of charging for establishment and fitout costs of franchised sites. Some franchisees were told that the initial fees payable to Geowash were reflective of the actual setup costs for a site, but in actual fact, a large portion was paid to Geowash’s director and franchising manager as commissions. The surplus was then expended to setup costs, and many franchisees billed extra when budgets were exceeded. These costs were often initially marketed as a fixed or capped cost. After signing their franchise agreements, franchisees later learned the actual costs they were expected to pay often far exceeded the initial figure stated by Geowash. Many franchisees were then left with inferior car wash sites, and some never even received their car wash.
The decision is a timely reminder that franchisors must be extremely careful about the statements, promises and representations made to prospective franchisees in the negotiations before entering a franchise agreement. If something said about a future matter is relied upon by a franchisee, then turns out to be untrue or misleading, and causes the franchisee financial detriment, a franchisor can land in hot water.
Whilst the ACCC unsuccessfully tried to hold Geowash’s director and franchising manager personally liable, the decision nonetheless shows that had the circumstances been different, there is a real risk that individuals involved in such conduct may be held personally liable.
Franchisors should take careful note of the key takeaways from the Geowash decision:
- Don’t advertise franchises in a way that gives an impression that a franchisee can achieve a certain profit or turnover. Franchisees should always be made aware that the success of their business will be dependent on their own business efforts.
- If you tell a prospective franchisee that a fee will be calculated a certain way using a certain method, then don’t deviate from that. Geowash told franchisees that their initial fees were calculated based on actual costs to be incurred for establishing a site, but in actual fact, the fees were first determined based on the franchisee’s spending capacity, and a large portion then allocated towards undisclosed commissions. If you collect a fee for a particular purpose, then you must expend it towards that purpose.
- Don’t market something as a fixed or capped cost, and then attempt to introduce additional costs not previously disclosed.
- If fees disclosed to prospective franchisees are only estimates and based on variables, then make that very clear. Disclose the factors that determine whether the final fee will fit into the lower or higher end of the estimate.
- Only charge franchisees in accordance with your rights under the franchise agreement and disclosure document. If you want the right to collect installment payments or change charging methods, ensure your documents allow this. Don’t expect to collect a fee that you don’t have a contractual right to charge.
- Ensure consistency between the information and documents given to prospective franchisees.
- Don’t claim to have experience or commercial relationships that you don’t actually have.
- Don’t claim to use a certain site selection criteria or process, when in fact you don’t.
- Keep detailed records in support of every promise, statement or representation you make, especially about future matters. The onus is on you to prove that you had a reasonable basis to make it. If you can’t support your statement, then don’t make it. Avoid stating personal opinions, and train your staff on what they can and cannot say.
- Select your franchisees carefully. Ensure their level of experience is appropriate for the franchised business. Take extra care with migrant franchisees. If you know they aren’t cut out for the franchise, don’t offer it to them.
- If you know the prospective franchisee doesn’t have the financial means to enter or run the franchise, don’t offer it to them.
- Encourage your prospective franchisees to obtain their own independent legal, accounting and business advice.
- Finally, don’t promise something you can’t offer!
By Luke McKavanagh
Luke McKavanagh is a regular contributor to online and print media for Inside Franchise Business. This article which was previously published on the Inside Franchise Business website can be viewed at www.franchisebusiness.com.au