Rebates in franchising: what you need to know

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There is a whole new world in franchising with a new Code of Conduct that governs the sector. So what do you need to know? Here we look at what regulations the Code imposes on franchisor rebates.

What is a rebate?

The term rebate is not defined in the regulations. A supplier rebate is usually money or a credit paid to the distributor (in this case, the franchisor) by a supplier based on a negotiated supply agreement. Supplier rebates affect gross margins by decreasing the cost of an item. 

The issue in franchising

The issue in franchising is that the franchisor negotiates and generally gains the benefit of the rebate or incentive. The franchisee continues to pay the wholesale value for the goods or services and generally does not receive a share of the rebate unless the franchisor has agreed to pass on all or part of that rebate to the franchisee. 

The franchisor wins by gaining an added revenue stream however the franchisee loses as they may be forced to continue to sell their product or services in a competitive market at very low margins. 

Some of the Code stays the same

The new Franchising Code recognizes that supplier rebates to franchisors are legal and not prohibited.  Under the previous Code franchisors were:

  • required to disclose whether or not the franchisor or an associate of a franchisor would receive a rebate or other financial benefit from the supply of goods or services to franchisees and if so, the business providing the benefit; and
  • whether any part of the rebate would be shared directly or indirectly, with the franchisees.

The new Franchising Code mirrors those provisions. However there was not, and is not, any requirement for the franchisor to account to or share the rebate or any part of it with the franchisee.

It should be noted that the Code does not specifically require the actual value or amount of the rebate to be disclosed to the franchisee which is in my view, disappointing unlike the new disclosure requirement in relation to lease incentives or benefits where the provision states “details of any incentive or financial benefit” are to be disclosed.

Rebates and approved supplier issues 

The issue of rebates is closely aligned with the obligation on franchisees to purchase products from approved suppliers. 

To a large extent franchisees are hamstrung, in that they must only purchase from approved suppliers from whom the franchisor may have negotiated rebates.

Disputes arise where franchisees believe they are not getting the best deal or they can obtain similar product from other suppliers at a better price. 

Franchisors also need to be mindful of their behaviour in this area by reason of the good faith obligations now entrenched in the new Code as from 1 January 2015. 

Has the new Code addressed those issues?

To a certain extent it has, however, disclosing the actual value of the rebates would in my view, be preferable and give greater transparency. The question is should the value of the rebates be disclosed by the franchisor exercising good faith and best practice in any event.

The new Franchising  Code 2015 seeks to provide greater transparency between the parties and balance up the rights and obligations of the parties. Franchisors should also be aware of the increased powers of the ACCC to now impose infringement notices and fines for breach of their obligations under the new Franchise Code 2015.

Lease incentives and financial benefits

A lease incentive or financial benefit from a landlord is not a rebate.

Franchisees often raise concerns that the franchisor has negotiated a lease incentive or benefit whether as a fit‑out or rental concession not disclosed to the franchisee.

The new Franchising Code has clarified that issue by requiring under clause 13, that franchisors must disclose details of any incentive or financial benefit that the franchisor or an associate receives as a result of entering into a lease or agreement to lease. Failure to do so can make the franchisor liable to a civil penalty. 

The Code is regulated by the Australian Competition and Consumer Commission.

Robert Toth

Robert Toth is franchise partner at Marsh & Maher Richmond Bennison. Robert is a Business Law Accredited Specialist, a member of the International Franchise Lawyers Association (IFLA), and a member of the Australian Institute of Company Directors. View More...
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