Small Business

Do your research: don’t get caught by a franchise scam

Although not particularly common, franchise scams do happen. As the Australian Competition and Consumer Commission’s ScamWatch points out, these scams often come in the form of a pyramid scheme dressed up as a reputable franchise. These scams or often found advertised online. Potential victims may stumble across their websites directly, or through an online selling platform. They will look very real, thanks to slick and professional design and may contain information that appears genuine. However digging deeper it can be difficult to find out exactly what is being bought or sold. In order to participate the purchaser may need to pay a significant fee upfront to join the franchise, and might be required to recruit other people to the scheme. In 2009, then Deputy Chairman of the ACCC Dr Michael Schaper, described the impact of such schemes. “These scams usually promise a risk-free investment with immediate high returns, but then don’t deliver,” he said. “Unsuspecting franchisees are then invariably left in a position where they cannot succeed, regardless of how much effort they put into the business. “The false 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 on the spot. “The scammers may misrepresent the franchise earning potential, ease of operation, success of existing franchises, initial outlay and the training and support that will be provided to the franchisee.” Marsh & Maher lawyer Marianne Marchesi says these scams highlight the importance of doing your due diligence before pursuing any business opportunity. “Franchises that promise ‘get rich quick’ schemes should ring alarm bells, as in fact franchisors are generally reluctant to make such promises,” she says. “An obvious warning that a franchise scam might include the fact that the franchisor does not have a disclosure document (or that it is incomplete), as this will indicate that the franchisor is not compliant with the (Franchising Code of Conduct). “Franchisees should always do their due diligence before committing to a franchise. Speak to other existing franchisees, seek legal and accounting advice and research the franchisor online.”